mainfile.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
|
ý
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the fiscal year ended June 30, 2008
|
|
|
|
OR
|
|
|
q
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [NO FEE REQUIRED]
|
|
|
|
For
the transition period from _______ to _____
|
|
|
Commission
file number 0-27887
COLLECTORS
UNIVERSE, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
|
|
33-0846191
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer Identification No.)
|
Incorporation
or organization)
|
|
|
1921
E. Alton Avenue, Santa Ana, California
|
|
92705
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(949)
567-1234
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: Common Stock, par
value $.001 per share
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate,
by check mark, whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports); and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate,
by check mark, if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition
of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act, (check one):
Large
accelerated filer o
|
Accelerated
filer ý
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
Indicate
by check mark whether the Registrant is a shell company (as defined in
Securities Exchange Act Rule 12b-2).
YES [ ] NO x
As of
December 31, 2007, the aggregate market value of the Common Stock held by
non-affiliates was approximately $91,601,261 based on the per share closing
price of $12.30 of Registrant’s Common Stock as of such date as reported by the
Nasdaq Global Market.
As of
September 26, 2008, a total of 8,361,344 shares of Registrant's Common Stock
were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Except as
otherwise stated therein, Items 10, 11, 12, 13 and 14 in Part III of the Form
10-K are incorporated by reference from Registrant's Definitive Proxy Statement,
which is expected to be filed with the Securities and Exchange Commission on or
before October 28, 2008, for its Annual Meeting of Stockholders scheduled to be
held on December 2, 2008.
COLLECTORS
UNIVERSE, INC.
FORM
10-K
FOR
THE FISCAL YEAR ENDED JUNE 30, 2008
TABLE
OF CONTENTS
PART
I
|
|
|
Page
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
30
|
|
|
|
36
|
|
|
|
36
|
|
|
|
37
|
|
|
|
38
|
|
|
|
38
|
PART
II
|
|
|
|
|
|
|
39
|
|
|
|
40
|
|
|
|
42
|
|
|
|
63
|
|
|
|
64
|
|
|
|
65
|
|
|
|
66
|
|
|
|
67
|
|
|
|
68
|
|
|
|
69
|
|
|
|
71
|
|
|
|
101
|
|
|
|
101
|
|
|
|
104
|
PART
III
|
|
|
|
|
|
|
104
|
|
|
|
104
|
|
|
|
104
|
|
|
|
104
|
|
|
|
104
|
|
|
|
|
PART
IV
|
|
|
105
|
|
|
|
S-1
|
|
E-1
|
Statements
contained in this Annual Report that are not historical facts or that discuss
our expectations, beliefs or views regarding our future operations or future
financial performance, or financial or other trends in our business, constitute
“forward-looking statements” as defined in the Private Securities Reform Act of
1995. Forward-looking statements can be identified by the fact that
they do not relate strictly to historical or current facts. Often,
such statements include the words “believe,” “expect,” “anticipate,” “intend,”
“plan,” “estimate,” “project,” or words of similar meaning, or future or
conditional verbs such as “will,” “would,” “should,” “could,” or
“may”. Forward looking statements are estimates or predictions about
the future. Those estimates or predictions are based on current
information and are subject to a number of risks and uncertainties that could
cause our financial condition or operating results in the future to differ
significantly from those expected at the current time, as described in the
forward-looking statements that are contained in this Annual
Report. Those risks and uncertainties are described in Item 1A of
Part I of this Annual Report under the caption “Risk Factors,” and in Item 7 of
Part II under the caption “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” Accordingly, readers of this
Annual Report are urged to read the cautionary statements contained in those
items of this Annual Report. Due to these uncertainties and risks,
readers are cautioned not to place undue reliance on such forward-looking
statements contained in this Annual Report, which speak only as of the date of
this Annual Report. We undertake no obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
PART
I
Overview
We are a
leading provider of value-added authentication, grading and information services
to dealers and collectors of high-value coins, sportscards, autographs, stamps
and vintage U.S. currency notes (which we will sometimes generally refer to as
“collectibles”) and to wholesale and retail dealers of diamonds and colored
gemstones.
Collectibles. The
collectibles that we authenticate and grade have market values generally ranging
from $100 to over $1 million, due principally to their rarity, age or
association with famous individuals or historical events.
The
authenticity and the state of preservation, or quality, of these collectibles
are also important determinants of their value in the collectibles
markets. For that reason, sellers, purchasers and collectors submit
their high-value collectibles to us for:
|
•
|
Certifications
by our independent experts of their authenticity; that is, confirmation
that the collectibles are real and are what they have been represented to
be; and
|
|
•
|
Evaluations
of their physical condition and appearance and the assignment of a grade
by our independent experts on the basis of uniform quality
standards.
|
Once we
have authenticated and assigned a grade to a collectible, we encapsulate it in a
tamper-evident, clear plastic holder, or issue a certificate of authenticity,
that (i) identifies the specific collectible, (ii) sets forth the
quality grade we have assigned to it and (iii) bears one of our brand names
and logos: “PCGS” for coins, “PSA” for sportscards, “PSA/DNA” for autographs and
memorabilia, “PSE” for stamps and “PCGS Currency” for U.S. vintage currency
notes1. Additionally, we warrant our certification of
authenticity and the grade that we assign to the coins, sportscards, currency
and stamps bearing our brands. We do not warrant our authenticity determinations
for autographs.
Diamonds and Colored
Gemstones. In November 2005, we began offering diamond
authentication and grading services to wholesale and retail dealers of diamonds
as a result of our acquisition of Gem Certification & Appraisal Lab (GCAL),
an independent diamond certification and grading laboratory. In
August 2006, we began offering identification, authentication and grading
services to wholesale and retail dealers of high value colored gemstones,
including emeralds, rubies and sapphires, as a result of our acquisition of
American Gemological Laboratories (AGL), an independent colored gemstone
certification and grading laboratory.
1
|
Collectors
Universe, PCGS, Professional Sports Authenticator and PSA/DNA, Set
Registry, CU3000 First Strike, and each of the logos associated with those
names, are registered service or trade marks of the
Company.
|
The market values of
the diamonds and colored gemstones that we grade generally range from
approximately $200 to over $1 million, depending, in the case of diamonds,
primarily on their weight, color and clarity. The market values of
colored gemstones depend primarily on their color, tone, and clarity and the
presence of and type of enhancements, which are made to almost all colored
gemstones to improve their color or clarity or both. The market value
of a colored gemstone also can be affected by its country of
origin.
Our
customers, who usually consist of wholesale and retail dealers and auction
companies, submit diamonds and colored gemstones to us for:
§
|
Confirmations,
by our independent experts, that the diamonds or colored gemstones are, in
fact, natural (as opposed to synthetically manufactured);
and
|
§
|
Evaluations
of their physical condition and appearance and the assignment of a grade
by our independent experts on the basis of uniform quality standards that,
in the case of diamonds, relate to their color and clarity and, in the
case of colored gemstones relate to color, tone, clarity, enhancements
and, in some cases, country of
origin.
|
Our Diamond Grading and
Certification Services. Upon completion of the grading process
for diamonds, a GCAL certificate is issued that sets forth the weight, cut,
color and clarity grades assigned to the diamond by GCAL, along with other
information that is measured as part of the grading process, such as the
dimensions of the diamond. GCAL also includes a direct light
performance analysis of each diamond utilizing a proprietary process that
measures, in a digital image, the number of pixels of light that pass through a
diamond, ranking the light performance higher for more light and lower for less
light. A similar process measures the symmetry of the cut of the
diamond, another feature that can have a direct impact on the brilliance and
reflectivity of a diamond. A graphic representation of the brilliance
and symmetry is included on the certificate. Additionally, using a
patented technology for non-invasive diamond identification that we acquired in
December 2005, we digitally capture and record the unique refractive light
pattern of the diamond (which we refer to as a “Gemprint”), that we store in our
computer database, cross-indexed to the certificate number issued with the
diamond2. This “Gemprint” process enables us
to match GCAL graded diamonds, on a one-to-one basis, with their GCAL
certificates, thereby providing an additional measure of protection against
misrepresentations of diamond quality that can occur by, for example, switching
a diamond grading certificate issued for a higher quality diamond to a lower
quality diamond. GCAL provides a limited warranty with respect to the
color and clarity grades that GCAL assigns to the diamonds it
certifies.
We
believe that Gemprint’s process provided by GCAL is the only non-intrusive
diamond identification service offered by any diamond certification company and
that no diamond certification company, except GCAL, warrants the color and
clarity grades it assigns to the diamonds they certify.
In fiscal
2008, we began offering some of our services separately that were previously
only available as a part of the bundled services on a diamond grading
certificate. These separately offered services, include the issuance
of (i) a direct light performance report, which provides information on the
optical brilliance and optical symmetry of a diamond that can assist a retailer
in demonstrating one of the most important points of differentiation between two
or more diamonds; and (ii) a Diamond ID report that provides a “gemprint” of the
diamond and registration of that gemprint in our global database to assist in
positive identification of the diamond in the event it is lost or stolen or to
confirm its authenticity in the event the owner later seeks to sell
it.
2
|
GCAL,
Gemprint and AGL and each of the logos associated with their respective
names, are registered service marks of the
Company.
|
Additionally,
in fiscal 2008, we launched the Certified Diamond Exchange (CDE), an Internet
based business-to-business exchange exclusively for GCAL certified
diamonds. The buyers and sellers on CDE register with us, which
entitles them, without charge, to buy or sell GCAL certified diamonds on the
exchange. The buyers on CDE are generally retailers and jewelry
manufacturers. Wholesale sellers have presented for purchase millions
of dollars of GCAL certified diamonds and will generally deliver the diamond via
overnight delivery directly to the buyer’s store or
facility. There are over 30,000 retailers in the United States
registered with the Jewelers Board of Trade and since inception in November
2007, CDE has registered over 2,000 buyers. The sellers on CDE are,
for the most part, diamond dealers and cutter/polishers who offer diamonds on
the exchange that are GCAL certified diamonds. CDE increases the
availability and distribution of GCAL certified diamonds and provides an
incentive for diamond sellers to obtain GCAL diamond certifications on diamonds
in order to place those diamonds on the CDE for sale directly to thousands of
retailers in the United States who have registered to purchase GCAL certified
diamonds on the CDE.
Our Colored Gemstone Grading and
Certification Services. AGL offers different levels of service
to its customers:
·
|
Its
“Prestige” Service, which is designed for grading and certification of
colored gemstones whose weight and market value justify the costs of a
higher level and more comprehensive suite of grading and certification
services; and
|
·
|
Its
“Fast Track” Service, which is designed for lower weight and less valuable
colored gemstones.
|
AGL’s
Prestige Service provides the customer with a comprehensive quality analysis and
report that sets forth the identification, weight, cut, color, tone and clarity
grades assigned to the gemstone, along with the description of the quality
enhancements that had been made to the gemstone and, in some cases, its country
of origin. A high resolution color image of the colored gemstone is
included on the certificate for identification purposes.
AGL’s
Fast Track Service allows the customer to select from among a variety of grading
services that includes, for a minimum fee, information relating to the
identification, weight and cut of the gemstone, which is set forth on a small
plastic card, similar in size and materials to a credit card. Fast
Track customers also may order one or more supplemental services that will
provide them with information regarding the color, tone, clarity and/or country
of origin of the gemstone, for additional fees that will vary based on the
extensiveness of the services ordered.
AGL
warrants the identification information with respect to the colored gemstones it
certifies, but does not warrant information relating to the enhancement, color,
clarity or country of origin of the colored gemstone.
In fiscal
2008, we developed the Colored Gemstone Exchange (CGE), an Internet based
business-to-business exchange exclusively for gemstones carrying AGL documents.
The buyers and sellers on CGE register with us, which entitles them, without
charge, to buy and sell AGL certified colored gemstones from the
exchange. The buyers on CGE are generally retailers and jewelry
manufacturers. Gemstone dealers list for purchase on the CGE,
gemstones with AGL documentation as to their identification, weight, shape and
enhancements. Of key importance in this market is the inclusion of
color images on the exchange for each of the gemstones, since the color of a
colored gemstone is perhaps the most important feature. Generally, in
the current marketplace, there are no methods for a buyer to know the color of a
gemstone without physical examination as imaging is not widely utilized. Because
each gemstone has an AGL document with an image, CGE electronically shares the
digital image from the AGL document database to display an attractive color
image. On CGE, buyers have the opportunity to purchase these
gemstones directly from wholesale sellers who will generally deliver the
gemstone via overnight delivery directly to the buyer’s store or
facility. The sellers of AGL certified gemstones on the CGE are
primarily gemstone dealers and cutter/polishers. We believe that CGE
increases the availability and distribution of many of the smaller colored
gemstones, valued from $200 to approximately $20,000, that carry the new AGL
Fast Track documentation and that the increased liquidity offered by CGE creates
an incentive for gemstone sellers to obtain AGL Fast Track documentation for
these smaller and less valuable colored gemstones..
Benefits Provided by our
Authentication and Grading Services. We believe that our
authentication and grading services increase the liquidity and marketability
and, therefore, add to the value, of the collectibles, diamonds and colored
gemstones that we authenticate and grade. Our services provide
sellers, purchasers and collectors with (i) the confidence of knowing that
the collectibles, diamonds or colored gemstones they are buying or selling are
authentic or natural, as the case may be; (ii) information, in the form of
objective
and uniform measures of quality, that enable sellers, purchasers and collectors
to assess the value of those collectibles, diamonds or colored gemstones; and
(iii) information, based on analysis of the colored gemstone and
technological comparisons to known origin specimens, relating to the country of
origin of a colored gemstone. Armed with this information, a
prospective buyer who might otherwise be reluctant to purchase a high-priced
collectible, diamond or colored gemstone, is more informed and more confident
about, and more willing to make such a purchase, particularly “sight-unseen,” on
Internet auction sites such as those operated by eBay and Blue Nile and even in
higher value assets as may be offered by Sotheby’s. We also believe
that dealers who sell collectibles, diamonds or colored gemstones that have been
authenticated and graded by us are more readily able to sell, and are more
likely to obtain higher prices for, those items than if they had not been
authenticated and graded by us, because our services give prospective buyers the
confidence to purchases those collectible, diamonds or colored gemstones from
those dealers.
We
originated the standards and methodologies we use for authenticating and grading
coins, sportscards, autographs and stamps. Those standards and
methodologies have become generally accepted in the collectible coin, sportscard
and autograph markets. At the time we launched our independent third
party stamp grading service, the concept of grading the quality of stamps, in
addition to authenticating them, was relatively novel. Since that
time, our stamp grading standards have become increasingly accepted, especially
for higher value stamps.
The
standards and methodologies we use in grading diamonds are generally accepted in
the diamond market. Those standards and methodologies were developed by the
Gemological Institute of America, a non-profit educational
corporation. However, we believe that the diamond grading services we
offer differ from those that are available from competing diamond grading
services primarily in terms of the rigorousness and consistency with which we
apply those grading standards. For that reason, among others, Blue
Nile, which is the largest seller of diamonds on the Internet, has chosen GCAL
to certify all of Blue Nile’s Signature Collection which, according to Blue
Nile, includes the world's most brilliant round diamonds, as well as the world's
first and only princess, emerald, and Asscher diamonds, cut to Blue Nile’s
finest ideal standards.
AGL has
developed certain proprietary standards for the colored gemstone market relating
to color, tone and clarity of colored gemstones and descriptive terms used in
the disclosure of colored gemstone enhancements.
We also
have developed some of the leading brands in the collectibles, diamonds and
colored gemstones markets in which we conduct our business:
§
|
“PCGS”
(Professional Coin Grading Service), which is the brand name for our
independent coin authentication and grading
service;
|
§
|
“PSA”
(Professional Sports Authenticator), which is the brand name for our
independent sports and trading cards authentication and grading
service;
|
§
|
“PSA/DNA”
(PSA/DNA Authentication Services), which is the brand name for our
independent authentication and grading service for vintage autographs and
memorabilia;
|
§
|
“PSE”
(Professional Stamp Experts), which is the brand name for our independent
stamp authentication and grading
service;
|
§
|
“PCGS
Currency” the brand name for our currency authentication and grading
service;
|
§
|
“GCAL”
(Gem Certification & Assurance Lab), which is the brand name for our
independent diamond authentication and grading service;
and
|
§
|
“AGL”
(American Gemological Laboratories), which is the brand name of our
independent third party colored gemstone grading
business.
|
PCGS and
PSA are among the leading independent authentication and grading services in the
collectible coin and sportscard markets in the United States. PSA/DNA
and PSE also are among the leading independent authentication services in their
respective markets. Currency authentication and grading are new to
the currency market and PCGS Currency is one of the leading independent
authentication and grading services in the currency market. GCAL is
among the top quality independent authentication and grading services in the
diamond market and we believe it is the only diamond certification service that
offers a non-invasive and unchangeable diamond identification method that makes
it possible to detect the switching or alteration of diamond grading
certificates and the only service that offers a warranty with respect to the
quality grades relating to the diamond’s color and clarity. AGL is
one of the world leaders in colored gemstone authentication, grading,
enhancement disclosure and for the most valuable colored gemstones,
identification of the country of origin.
We began
offering our PCGS coin authentication and grading services in 1986 and, from
inception through fiscal year ended June 30, 2008, we had authenticated and
graded more than 15 million coins. In 1991, we launched our PSA
sportscard authentication and grading service and, through June 30, 2008, had
authenticated and graded over 11 million sportscards. In 1999, we
launched our PSA/DNA vintage autograph authentication business and in June 2004
we extended that business by introducing vintage autograph grading services to
dealers and collectors of autographed sports memorabilia. We started our PSE
stamp authentication and grading service in 2000. We launched PCGS
Currency as an extension of the PCGS brand in March 2005. In the second quarter
of fiscal 2006, we acquired GCAL and the Gemprint technology. We
acquired AGL in the first quarter of fiscal 2007.
The
following table provides information regarding the respective numbers of coins,
sportscards, autographs and stamps that we authenticated or graded from 2006 to
2008, the number of diamonds we authenticated and graded since the acquisition
of GCAL, our diamond authentication and grading service, in the second quarter
of fiscal 2006 and the number of colored gemstones we authenticated and graded
since the acquisition of AGL, our colored gemstone authentication and grading
service, in the first quarter of fiscal 2007.
|
|
Units
Processed
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Coins
|
|
|
1,474,900 |
|
|
|
47 |
% |
|
|
1,558,700 |
|
|
|
50 |
% |
|
|
1,786,300 |
|
|
|
55 |
% |
Sportscards
|
|
|
1,329,500 |
|
|
|
42 |
% |
|
|
1,262,700 |
|
|
|
41 |
% |
|
|
1,200,300 |
|
|
|
37 |
% |
Autographs
|
|
|
199,600 |
|
|
|
6 |
% |
|
|
169,800 |
|
|
|
5 |
% |
|
|
179,700 |
|
|
|
6 |
% |
Stamps
|
|
|
53,000 |
|
|
|
2 |
% |
|
|
66,200 |
|
|
|
2 |
% |
|
|
37,000 |
|
|
|
1 |
% |
Currency
|
|
|
59,200 |
|
|
|
2 |
% |
|
|
36,200 |
|
|
|
1 |
% |
|
|
28,800 |
|
|
|
1 |
% |
Diamonds(1)
|
|
|
30,000 |
|
|
|
1 |
% |
|
|
25,000 |
|
|
|
1 |
% |
|
|
6,700 |
|
|
|
- |
|
Colored
Gemstones(2)
|
|
|
4,700 |
|
|
|
- |
|
|
|
2,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
3,150,900 |
|
|
|
100 |
% |
|
|
3,120,600 |
|
|
|
100 |
% |
|
|
3,238,800 |
|
|
|
100 |
% |
The
following table sets forth the estimated values at which our customers insured
the collectibles, diamonds and colored gemstones that they submitted to us for
grading or authentication.
|
|
Declared
Values (000)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Coins
|
|
$ |
1,327,000 |
|
|
|
73 |
% |
|
$ |
1,435,000 |
|
|
|
82 |
% |
|
$ |
1,613,000 |
|
|
|
90 |
% |
Sportscards
|
|
|
90,000 |
|
|
|
5 |
% |
|
|
88,000 |
|
|
|
5 |
% |
|
|
75,000 |
|
|
|
4 |
% |
Autographs
|
|
|
26,000 |
|
|
|
2 |
% |
|
|
24,000 |
|
|
|
1 |
% |
|
|
15,000 |
|
|
|
1 |
% |
Stamps
|
|
|
25,000 |
|
|
|
1 |
% |
|
|
12,000 |
|
|
|
- |
|
|
|
21,000 |
|
|
|
1 |
% |
Currency
|
|
|
45,000 |
|
|
|
2 |
% |
|
|
32,000 |
|
|
|
2 |
% |
|
|
43,000 |
|
|
|
2 |
% |
Diamonds(1)
|
|
|
225,000 |
|
|
|
12 |
% |
|
|
97,000 |
|
|
|
6 |
% |
|
|
27,000 |
|
|
|
2 |
% |
Colored
Gemstones(2)
|
|
|
93,000 |
|
|
|
5 |
% |
|
|
62,000 |
|
|
|
4 |
% |
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
1,831,000 |
|
|
|
100 |
% |
|
$ |
1,750,000 |
|
|
|
100 |
% |
|
$ |
1,794,000 |
|
|
|
100 |
% |
1 We
commenced the authentication and grading of diamonds in the second quarter of
2006 when we acquired GCAL and
Gemprint.
2 We commenced the authentication and
grading of colored gemstones in the first quarter of 2007, when we acquired
AGL.
We
generate revenues principally from our authentication and grading service
fees. For collectibles, those fees range from $4 to over $200 per
item authenticated and graded, based primarily on the type of item authenticated
or graded and the turn-around times selected by our customers, which range from
1 to approximately 60 days. In fiscal 2008 our authentication and
grading fees for all our businesses averaged $10.90. As a general rule,
collectibles dealers and, to a lesser extent, individual collectors, request
faster turn-around times and, therefore, generally pay higher fees for more
valuable, older or “vintage” collectibles, than they do for modern
collectibles. Diamond authentication and grading fees, generally
range from $30 to over $300 based on the weight of the diamond and are fixed
with specific delivery times; although fees sometimes vary in the case of
contracts that provide for volume submissions. Authentication and
grading fees for AGL range from $25 to $2,500 based on whether the customer
requests our Prestige Service or our Fast Track Service, the weight of the
colored gemstone and whether the customer requests that we certify the country
of origin of the colored gemstone.
We also
generate on-going revenues, to a lesser extent, from (i) sales of advertising on
our websites; (ii) sales of our printed publications and price guides and
advertising placed in such publications; (iii) sales of our rarity or
“population” reports that contain data regarding the total number of coins and
sportscards we have graded since our inception, categorized by item type and
grade determination; (iv) monthly subscription fees associated with our
Internet-based, dealer to dealer exchange “CCE” (Certified Coin Exchange) for
certified coins; and (v) trade show management fees generated by our trade
show management company, Expos Unlimited LLC (“Expos”), which promotes and
manages two well known coin, stamp and collectibles shows in Long Beach and
Santa Clara, California, respectively. We believe that our printed
publications, price guides and reports make collectors better informed consumers
and make collecting more interesting and exciting for them while our dealer to
dealer exchange provides a source of additional liquidity to coin dealers
seeking to sell PCGS certified coins.
Industry
Background
The
primary determinants of the prices of, and the willingness of sellers,
purchasers and collectors to purchase, high-value or high-priced collectibles,
diamonds, colored gemstones or other high-value assets are their authenticity
and quality. The authenticity of a collectible relates not only to the
genuineness of the collectible, but also to the absence of any alterations or
repairs that may have been made to hide damage or to restore the item. The
authenticity of a diamond or colored gemstone relates to its formation in a
natural method and mined from the earth as opposed to laboratory grown or
synthetically produced, and in the case of colored gemstones, the country of
origin. The quality of a collectible relates to its state of
preservation relative to its original state of manufacture or creation. The
quality of a diamond is largely a function of its color and
clarity. The quality of a gemstone relates to color, tone,
clarity, enhancements and in some cases, the country of origin. With
regard to value, confirmation of authenticity generally is required before a
buyer is willing to proceed with a purchase of a high-priced collectible,
diamond or colored gemstone. Quality directly affects value and
price, usually on an exponential basis, with higher quality collectibles,
diamonds and colored gemstones, generally attracting dramatically higher prices
than those of lower quality. Even a relatively modest difference in quality can
translate into a significant difference in perceived value and, therefore, in
price. For example, a 1952 Mickey Mantle baseball card that received a PSA grade
from us of 9 on our PSA grading scale of 1-to-10 was sold at public auction in
2006 for $282,588. By comparison, a similar 1952 Mickey Mantle baseball card
that received a PSA grade of 8 was sold at public auction also in 2006 for
$72,057.
Although,
in the case of diamonds and colored gemstones, the weight of the stone (as
measured by mechanical devices) has a significant impact on value, quality
ratings also have a material impact on value. A round brilliant cut two carat
natural diamond with a GCAL grade D color (which is the most desirable
blue-white color on the scale from D to the yellow tint of a P color) and a
clarity grade of flawless or “FL” (which indicates that the diamond has no
imperfections or inclusions) has an approximate wholesale market value ranging
from $75,600 to $79,800. By comparison, a similar cut two carat diamond with a
GCAL grade I color and a clarity grade of SI2 (which is in the midpoint range of
clarity) has an approximate wholesale market value ranging from $13,200 to
$13,940. In the same manner, a rectangular cut two carat emerald with
AGL color grade 3, a tone of 70 (a very attractive and intense green)
and a clarity grade of “LI” (or lightly included) has an approximate market
value ranging from $18,000 to $20,250. By comparison, a similar cut emerald with
AGL color grade 6, a tone of 50 (an average color and intensity of green) and a
clarity grade of “MI2” (moderately included) has an approximate market value
ranging from $3,600 to $4,800. The country of origin, of a colored gemstone also
can affect its market value. For example, the same oval cut two carat
Blue Sapphire with an AGL color grade of 3, a tone of 70 (rich and deep blue)
and a clarity grade of “LI” has an approximate market value ranging from $2,800
to $3,400 if its country of origin is Burma, but would have an approximate
market value ranging from $20,000 to $22,000 if its country of origin is
Kashmir.
Until the
advent of independent third party authentication and grading, most prospective
buyers, including experienced collectibles, diamond and colored gemstone dealers
and retailers, insisted on physically examining high-priced collectibles,
diamonds and colored gemstones before consummating
transactions. However, unlike professionals in the trade, most
purchasers and collectors lacked the experience and knowledge needed to
determine, with confidence, the authenticity or the quality, and hence the
value, of high-priced collectibles, diamonds and colored gemstones, even when
they had the opportunity to examine them physically. As a result,
purchasers and collectors had to rely on representations made by sellers
regarding authenticity and quality. For these reasons, “buyer beware”
characterized the high-value collectibles, diamond and colored gemstone markets,
and “sight-unseen” markets for rare coins, diamonds, colored gemstones and other
high-value collectibles were practically non-existent.
High-value
collectibles have been traditionally marketed at retail by dealers through
direct mail, catalogues, price lists and advertisements in trade publications,
and sold and purchased by them at collectibles shows, auction houses and local
dealer shops. Diamonds and colored gemstones have been marketed at retail
through tens of thousands of retail jewelry stores or in departments of large
general retail stores. These markets were highly inefficient
because:
§
|
they
were fragmented and localized, which limited both the variety of available
collectibles, diamonds and colored gemstones and the number of potential
buyers;
|
§
|
transaction
costs were often relatively high due to the number of intermediaries
involved;
|
§
|
buyers
usually lacked the information needed to determine the authenticity and
quality and, hence the value, of the collectibles, diamonds and colored
gemstones being sold; and
|
§
|
buyers
and sellers were vulnerable to fraudulent practices because they had to
rely on the dealers or other sellers in the often long distribution
channel for opinions or representations as to authenticity and
quality.
|
Coin Market. In an
effort to overcome some of these inefficiencies, approximately 30 years ago,
professional coin dealers began using a numerical grading scale for grading
coins. That scale ranged from 1 to 70, with higher numbers denoting a higher
quality. Previously, professional dealers used descriptive terms, such as
“Fair,” “Fine” and “Uncirculated,” to characterize the quality of the coins they
sold, a practice that continued after the development of the numeric grading
system. However, whether using a numeric or a descriptive system, grading
standards varied significantly from dealer to dealer, depending on a dealer’s
subjective criteria of quality. Moreover, dealers were hardly disinterested or
independent since, as the sellers or buyers of the coins they were grading, they
stood to benefit financially from the assignment of a particular
grade.
Sportscard
Market. Misrepresentations of authenticity and quality also
operated as a barrier to the liquidity and growth of the collectibles market for
sportscards. Even experienced and knowledgeable dealers insisted on
physically examining purportedly rare and higher priced
sportscards. Most collectors lacked the knowledge needed to purchase
collectible sportscards with confidence, even when they had physically examined
them. Sportscard dealers eventually developed a rudimentary
adjectival system to provide measures of quality, using descriptive terms such
as “Poor,” “Very Good,” “Mint” and “Gem Mint.” These measures of quality were
assigned on the basis of such characteristics as the centering of the image on
the card and the presence or absence of bent or damaged corners, scratches and
color imperfections. However, as was the case with coins, grading standards
varied significantly from dealer to dealer, depending on a dealer’s subjective
criteria of quality. Additionally, since the dealers who bought and sold
sportscards were the ones that assigned these grades, collectors remained
vulnerable to fraudulent practices.
Autographed Memorabilia
Market. The market for autographed sports, entertainment and
historical memorabilia has been plagued by a high incidence of forgeries and
misrepresentations of authenticity. For example, Operation Bullpen, initiated by
the FBI and other law enforcement agencies beginning in 1997, has uncovered a
high volume of outright forgeries of signatures and widespread
misrepresentations as to the genuineness of sports memorabilia. We believe that
the high incidence of such fraudulent activities was due, in large part, to a
dearth of independent third party memorabilia authentication services and an
absence of systematic methodologies and specimen data needed for verification of
authenticity.
Stamp
Market. Stamp dealers developed an adjectival system, similar
to the one developed for sportscards, by which they valued and priced stamps
based primarily on the centering of the stamp image on the stamp paper
background, ignoring other faults in the stamp. As a result, experienced and
knowledgeable dealers insisted on physically examining purportedly rare and
higher priced stamps before purchasing them. Additionally, most collectors
lacked the knowledge and experience needed to purchase higher priced stamps with
confidence. Consequently, as was the case with coins and sportscards, collectors
were forced to depend on representations of authenticity and quality from the
very dealers from whom they purchased or to whom they sold
stamps. However, prior to our entry into the market, independent
third-party stamp grading was non-existent.
Currency
Market. There has been some grading of currency in the past,
but none of the grading businesses have been successful as the market was not
developed, such that there was not substantial demand for grading
services. In addition, the grading businesses were not third-party
independent grading businesses, as they were operated and owned by currency
dealers, who also bought and sold the same materials that they graded; thereby,
creating potential conflicts of interest. PCGS Currency is an
independent third-party grading service that does not have such conflicts of
interest. Our currency grading utilizes a numerical 70 – point system
to determine the overall grade or condition of a note.
Diamond
Market. Approximately 70 years ago, the
Gemological Institute of America (“GIA”), a non-profit educational corporation,
developed a system for classifying and grading diamonds which consisted of the
“4C’s” of carat, cut, color and clarity. The system provided
terminology for identifying (1) the weight of a diamond, denominated as
“carats,” (2) the shape and proportion of the diamond with a cut analysis;
(3) the relative color of the diamond using an alphabetic scale from a high
quality color of “D” to the lowest quality color of “P”; and (4) the
relative clarity of, or imperfections in the diamond, using descriptive terms on
a scale from “Flawless” (“FL”) to “Very Slightly Included” (“VSI”) to “Slightly
Included” (“SI”) to “Included” (I”). In its gemologist educational
programs, the GIA taught this grading system as a required part of the
curriculum. Notwithstanding the widespread use of common
terminology, these measures of quality can be subjectively and inconsistently
applied.
Colored Gemstone Market. Although the GIA has
held classes on the identification, authentication and grading of colored
gemstones for approximately 30 years, no significant standard or system of
color, tone and clarity grading has been in widespread use in the
marketplace. In addition, the availability of sample gemstones for
technical trace element analysis needed to determine country of origin was very
limited, in part because of the limitation of the number of trusted samples from
various regions of the world and in part due to the limitations of the
technology to examine and classify the samples. As a result,
buyers were largely dependent on subjective assessments of quality and country
of origin from the dealers from whom they purchased colored gemstones, and no
sight-unseen market for colored gemstones existed.
These
conditions created a need and the demand for independent authentication and
grading services from which sellers, purchasers and collectors could
obtain:
§
|
determinations,
from independent, third party experts, of the authenticity of the
high-value collectibles, diamonds and colored gemstones that sellers,
purchasers and collectors purchased, particularly “sight-unseen” or over
the Internet;
|
§
|
representations
of quality based on uniform standards applied by independent, third party
experts; and
|
§
|
authoritative
information, compiled by a credible third party, to help purchasers and
collectors understand the factors that affect an item’s perceived value
and price, including:
|
—
|
its
quality or grade; and
|
—
|
its
historical and recent selling
prices.
|
The Impact of eBay and other
e-Commerce Websites on the Collectibles, Diamond and Colored Gemstone
Markets. The advent of the Internet and, in particular, eBay’s
development of an Internet or “virtual” marketplace and other Internet-selling
websites such as Blue Nile and Amazon, have overcome many of the inefficiencies
that had characterized the traditional collectibles, diamond and colored
gemstone markets. eBay and other online marketplaces (i) offer
enhanced interaction between and greater convenience for sellers and buyers of
high-value collectibles, diamonds and colored gemstones; (ii) eliminates or
reduces the involvement of dealers and other “middlemen;” (iii) reduce
transaction costs; (iv) allow trading at all hours; and
(v) continually provide updated information. However, Internet
commerce still raises, and has even heightened, concerns about the authenticity
and quality of the collectibles, diamonds and colored gemstones that are listed
for sale on the Internet. Buyers have no ability to physically
examine them, and no means to confirm the identity or the credibility of the
dealers or sellers on the Internet. As a result, we believe that the
growth of Internet selling websites, such as eBay, Blue Nile and Amazon, has
increased awareness of the importance of, and the demand for, independent third
party authentication and grading services of the type we provide. Our
services enable purchasers and collectors to use the Internet to purchase
collectibles, diamonds and
colored
gemstones “sight-unseen,” with the confidence of knowing that they are authentic
and are of the quality represented by sellers. The importance and
value of our services to purchasers and collectors, we believe, are demonstrated
by:
§
|
eBay’s
inclusion, on its collectibles websites, of information that identifies,
and encourages visitors to use, our independent third party authentication
and grading services, as well as similar services offered by some of our
competitors; and
|
§
|
Blue
Nile’s use of GCAL’s services to certify all of the diamonds comprising
its Signature Collection, which are the highest quality diamonds that Blue
Nile sells, even when those diamonds have already been certified by other
well-known diamond certification
services.
|
Our
Services
PCGS Coin Authentication and Grading
Services. Recognizing the need for third party authentication
and grading services, we launched Professional Coin Grading Service in 1986.
PCGS employs expert coin graders, who are independent of coin buyers and
sellers, to provide impartial authentication and grading
services. Currently, we employ 20 experts who have an average of 27
years of experience in the collectible coin market. We also
established uniform standards of quality measured against an actual “benchmark”
set of coins kept at our offices. We place each coin that we
authenticate and grade in a tamper-evident, clear plastic holder that bears our
logo, so that any prospective buyer will know that it is a PCGS authenticated
and graded coin. We also provide a warranty as to the accuracy of our
coin authentication and grading.
By
providing an independent assessment by coin experts of the authenticity and
quality of coins, we believe that PCGS has increased the liquidity of the
trading market for collectible coins. Following the introduction of
our independent, third party authentication and grading service, buyer
confidence, even between dealers, increased to such a degree that coins
authenticated and graded by PCGS were able to be traded
“sight-unseen.” As a result, PCGS facilitated the development, in
1990, of a dealer market, known as the “Certified Coin Exchange,” on which coin
dealers traded rare coins “sight-unseen,” over a private satellite network,
which now operates on the Internet.
In
addition, we began to provide a range of authoritative content on coin
collecting to inform and communicate with the collector community, including
guides and reports that track the trading prices and the rarity of PCGS-graded
coins.
More
recently, our coin authentication and grading services have facilitated the
development of a growing Internet or “virtual” marketplace for collectible
coins. A prospective buyer, who might otherwise be reluctant to
purchase a high-priced coin listed on the Internet, is able to rely on a PCGS
certification in deciding whether or not to bid and in determining the amount to
offer for the coin. As a result, to enhance the marketability of
higher priced coins, many sellers submit their coins to PCGS for authentication
and grading. That enables the sellers to include, in their Internet
sales listings, digital images of the coins in their tamper-evident, clear
plastic holders, which identify the coins as having been authenticated and
graded by PCGS as well as their PCGS-assigned grades.
PSA Sportscard Authentication and
Grading Services. Leveraging the credibility and using the
methodologies that we had established with PCGS in the coin market, in 1991 we
launched Professional Sports Authenticator (PSA), which instituted a similar
authentication and grading system for sportscards. Our independent
sportscard experts certify the authenticity of and assign a grade to sportscards
using a numeric system with a scale from 1-to-10 that we developed, together
with an adjectival system to describe their condition. At June 30,
2008, we employed 15 experts who have an average of 24 years of experience in
the collectible sportscard market. We believe that our authentication
and grading services have removed barriers that were created by the historical
seller-biased grading process and, thereby, have improved the overall
marketability of and facilitated commerce in sportscards, including over the
Internet and at telephonic sports memorabilia auctions.
PSA/DNA Autograph Authentication and
Grading Services. In 1999, we launched our vintage autograph
authentication business, initially offering authentication services for
“vintage” sports autographs and memorabilia that were autographed or signed
prior to the time they were presented to us for authentication. The
vintage autograph authentication business is distinctly different from the
“signed-in-the-presence” authentication of autographs where the “authenticator”
is present and witnesses the actual signing. Vintage autograph
authentication can involve the rendering of an opinion of authenticity by an
industry expert based on (i) an analysis of the signed object, such as the
signed document or autographed item of memorabilia, to confirm its consistency
with similar materials or items that existed during the signer’s lifetime;
(ii) a comparison of the signature submitted for authentication with
exemplars; and (iii) a handwriting analysis. As of June 30,
2008, we employed 3 autograph experts with an average of 23 years of experience
in the autograph memorabilia market, as well as 3 consultants on a contract
basis.
In June
2004, we also began offering grading services for autographs, beginning with
baseballs containing a single signature or autograph. We use uniform
grading standards that we have developed and a numeric scale of 1-to-10, with
the highest number representing “Gem Mint” condition or top
quality. We assign grades to the collectibles based on the physical
condition or state of preservation of the autograph. Autograph
grading is in its infancy, and we cannot predict whether it will gain market
acceptance.
PSE Stamp Authentication and Grading
Services. In January 2000, we launched our Professional Stamp
Experts (PSE) as an independent, third party stamp authentication and grading
service. We use both an adjectival system and a numeric scale from
1-to-100 to grade stamps. We assign grades based on the centering of
the stamp image on the stamp paper background and the absence or presence of
other faults on the stamp. There have been viable third party stamp
authentication services in operation for several decades, and stamp dealers and
collectors had been using a subjective grading system based primarily on the
centering of the stamp image on the stamp paper background, ignoring other
faults. However, prior to our entry into the stamp market,
independent third party stamp grading was non-existent. As a result,
we encountered some resistance to this concept in the stamp collectibles market,
which is steeped in tradition and slow to change, as we did from coin dealers
when we launched PCGS and from sportscard dealers when we launched
PSA. In October 2005, the Philatelic Foundation based in New York
began using PSE’s numerical grading system to assign grades to
stamps. In the spring of 2006, Scott Publishing Company, the
long-time publisher of the Scott Catalogs also adopted and incorporated PSE’s
numerical grading system into their bi-annual valuing
supplement. These two events have established PSE’s numerical grading
scale, and we believe has facilitated the continuing spread of third-party stamp
authentication and grading, throughout the philatelic industry. As of
June 30, 2008, we employed 6 stamp graders, and use another expert on a
part-time basis. Those graders have an average of 33 years of
experience in the collectible stamp market.
Vintage U.S. Paper Currency
Authentication and Grading. In the third quarter of fiscal
2005, we began marketing a U.S. paper currency authentication and grading
service, which we decided to brand as “PCGS Currency” because many of the
dealers of currency notes are familiar with and have used PCGS’ coin
authentication and grading service. As of June 30, 2008, we employed
3 currency experts with 16 years of experience and use the services of 2 other
experts on a contract basis.
GCAL Diamond Authentication and
Grading Services. In November 2005, we acquired Gem Certification &
Assurance Lab (GCAL), which is as an independent, third party diamond
authentication and grading service that has been in the business of diamond
authentication and grading since 2001. We use the internationally recognized
system for grading diamonds, commonly referred to as the “4C’s”. In
December 2005, we acquired the assets of Gemprint Corporation, which consisted
primarily of a patented non-invasive diamond identification technology that
enables us to create and record the digital image of the unique refractive light
pattern or “fingerprint” (which we refer to as the “Gemprint”) of the diamonds
that GCAL grades. We store the digital image of the “Gemprint” in our
database, cross-indexed to the diamond’s grading certificate that is issued by
GCAL, which is assigned its own number for recordkeeping and identification
purposes. This “Gemprint” process enables us to match GCAL graded
diamonds, on a one-to-one basis, with their GCAL certificates, thereby providing
an additional measure of protection against misrepresentations of diamond
quality that can occur by, for example, altering the grading certificate or
switching a diamond grading certificate issued for a higher quality diamond to a
lower quality diamond.
There are
more than ten diamond grading services in operation. Four of those
existing grading services, including GIA, have been in operation for more than
20 years and are larger and better known than GCAL. However, unlike
GCAL, almost all of the key competitors are owned, managed or governed by
diamond dealers that are in the business of selling diamonds, including those
graded by such grading services. As a result, we believe that those
grading services potentially have inherent conflicts of interest when grading
diamonds submitted by those dealers and, therefore, do not provide truly
independent third party grading services. Additionally, unlike GCAL,
none of these existing services has any non-intrusive process to secure the
identification of diamonds that they have certified in order to make it possible
to detect misrepresentations of the quality which can occur by altering the
information on or switching a grading certificate. As a result, we
believe that GCAL’s greater independence and its Gemprint diamond identification
technology, along with the warranty of the quality determinations of color and
clarity that CGAL issues provide it with a competitive advantage that we are
promoting as a means of increasing GCAL’s share of the diamond grading
market. Currently, we employ 8 diamond graders who have an average of
21 years of diamond grading experience.
AGL Colored Gemstone Authentication
and Grading Services. In August 2006, we acquired American
Gemological Laboratories (AGL), one of the leading independent third party
authentication and grading services for colored gemstones, such as emeralds,
rubies and sapphires. Its services are used by, among others,
Sotheby’s and Christie’s for their jewelry auctions and by jewelry retailers
such as Cartier and Fred Leighton. AGL has been in the business of
authenticating and grading colored gemstones since 1977. We utilize the
fundamental information obtained in GIA vocational classes, but (i) express the
color and tone using a three digit system we developed called ColorScan; (ii)
express the color and hue combinations using a 1 to 10 scale in half-point
increments; (iii) describe tone on a scale of 0-100; and (iv) identify clarity
grades on a scale using descriptors such as “FI” meaning “Free from Inclusions”,
to “MI1” and “MI2” meaning “Moderately Included” to “E1”, “E2” and “E3” meaning
“Excessively Included”. Enhancement analysis and country of origin
identification are accomplished by comparing the gemstones to our database
reference set of over 5,000 colored gemstone samples, which we believe is one of
the largest such reference collections in the world, personally accumulated by
AGL’s president in travels around the world to various mining
sites. There are more than six competing colored gemstone
authentication and grading services in operation, of which, only three have been
in operation for a similar period of time as AGL. Currently, we
employ 4 grading experts with an average of 26 years of experience.
CCE Certified Coin Exchange and
Collectors Corner. In September 2005, we acquired the
Certified Coin Exchange (CCE), a subscription-based, business-to-business
Internet bid-ask market for third party certified coins. CCE has been
a marketplace in U.S. certified rare coin trading between major coin dealers in
the United States since 1990 with similar operations for uncertified coins
dating back to the 1960’s. The CCE website features over 200,000 bid
and ask prices for certified coins at www.certifiedcoinexchange.com. The
CCE provides liquidity in the geographically dispersed and highly fragmented
market for rare coins. In March 2007, we introduced the Collectors
Corner, a business-to-consumer website that enables sellers on CCE to offer many
certified coins simultaneously at wholesale prices on CCE and at retail prices
on Collectors Corner (www.collectorscorner.com). Registration
on Collectors Corner is free for consumers, and users can search for and sort
coins listed on Collectors Corner. Coin sellers must register and pay
a fixed monthly fee to CCE for access to and to effectuate sale transactions on
both CCE and Collectors Corner. Currently, Collectors Corner has over
44,000 coins offered for sale with offering prices aggregating in excess of $45
million. In December 2007, as an extension of the Collectors Corner
business-to-consumer website, we launched a segment for certified currency,
which makes the search and sorting capabilities of Collectors Corner available
to consumers of currency, as well as coins. Sellers of currency on
Collectors Corner pay a separate fixed monthly fee to list currency for
sale. Collectors Corner now has over 1,400 items of currency offered
for sale with offering prices aggregating approximately $3
million. In May 2008, as a further extension of Collectors Corner, we
launched a segment for sportscards. In a similar fashion to coins and
currency, all consumers are able to search and sort for certified
sportscards. Sellers of sportscards pay a separate fixed monthly fee
to list sportscards for sale. Collectors Corner now has over
32,000 sportscards offered for sale with offering prices aggregating more than
$3.5 million. Collectors Corner is receiving, on average, over 50,000
visits per month with over 425,000 pageviews. The enhanced liquidity provided by
CCE and Collectors Corner for certified coins, currency and sportscards,
increases the volume and turnover of these items, which benefits PCGS, PCGS
Currency and PSA, respectively, because, as a general rule, increases in sales
and purchases of coins, currency and sportscards increases the demand for our
authentication and grading services. If we succeed in growing CCE and
Collectors Corner, we believe that the CCE/Collectors Corner websites can become
the preeminent online markets for PCGS certified coins sold by dealers to other
dealers, and for coins, currency and sportscards certified by PCGS, PCGS
Currency and PSA, respectively, bought and sold between dealers and
consumers. We are in the process of further extending the concepts
and systems developed for Collectors Corner into the stamp market where we offer
authentication and grading certification services.
Publications and
Advertising. We publish authoritative price guides, rarity
reports and other collectibles data to provide collectors with information that
makes them better informed consumers and makes collecting more interesting and
exciting. Our publications also enable us to market our services, create
increased brand awareness and to generate advertising revenues. We publish Sports Market Report, which
we publish on a monthly basis primarily for distribution to approximately 7,600
PSA Collectors Club members and the Stamp Market Quarterly, which
we publish for distribution to approximately 2,000 stamp dealers and
collectors. In addition, we publish Palmieri’s Market Monitor, an
educational and informative diamond and gemstone-industry
publication. We sell advertising to dealers and vendors for placement
in our publications. We manage a Collectors Universe website and
individual
websites for our authentication and grading services. On those websites, we
offer collectible content, relevant to the marketplace for that specific
authentication and grading service, some of which is available for a fee and
some of which is available without charge. We believe our websites
for PCGS in coins and PSA in sports have the highest number of visitors and web
traffic in their respective markets. We sell advertising to dealers
and vendors on these two websites and on the websites we maintain for PCGS
Currency, PSE in stamps and CCE and Collectors Corner in
coins.
Our
Mission
Our mission is to provide the finest available authentication and grading
services to sellers and buyers of high-value collectibles and other high-value
assets in order to:
§
|
increase
the values and liquidity of the high value collectibles and other high
value assets;
|
§
|
enable
and facilitate transactions in high value collectibles and other high
value assets;
|
§
|
generally
enhance interest, activity and trading in high value collectibles and
other high value assets; and
|
§
|
achieve
profitable growth, build long-term value for our stockholders and provide
rewarding opportunities for our
employees.
|
Our
Growth Strategy
Our
growth strategies include:
§
|
Leveraging
the strong brand awareness that we have achieved in our existing
collectibles markets:
|
—
|
to
increase the demand for and use of our services not only by dealers, but
also by collectors, only a relatively small percentage of which use
independent authentication or grading services;
and
|
—
|
to
introduce new value-added services to customers in our existing
collectibles markets.
|
§
|
Increasing
GCAL’s market share by (i) offering services, such as its
Gemprint diamond identification service either combined with the
authentication and grading service or separately as a stand-alone service,
that are not available from its competitors, (ii) implementing marketing
programs targeted at sellers and purchasers of diamonds which emphasize
the benefits of the GCAL grading certificate, (iii) continuing to provide
faster turnaround service and more competitive pricing, and (iv) using the
selling incentive of the Certified Diamond Exchange (CDE) which offers
GCAL certified diamonds
exclusively.
|
§
|
Increasing
AGL’s share of the middle and high-end segment of the colored gemstone
market by (i) offering enhanced grading services, such as a guarantee of
identification, primarily to dealers and high-net worth consumers, (ii)
marketing the benefits of AGL’s services, including offering a lower
priced authentication and grading certificate, with accurate
identification and disclosure of appropriate enhancements, which are
needed by gemstone dealers to comply with Federal Trade Commission
guidelines, and (iii) using the selling incentive of the Colored Gemstone
Exchange which offers AGL documented gemstones
exclusively.
|
§
|
Identifying
and entering other high-value collectibles or high-value asset markets
where we believe we can succeed in building and meeting the demand among
dealers, sellers and buyers for independent, third party authentication
and grading services.
|
We are
pursuing the following strategic initiatives in order to achieve these growth
objectives:
Increasing the Demand for our
Services in Existing Collectibles Markets. We have established
leading brands in our existing collectibles markets, including PCGS, PSA,
PSA/DNA, PSE and PCGS Currency. We use those brands to promote
Collectors Universe as the premier provider of authentication and grading
services in the high-value collectibles markets, in order (i) to increase
our market share among existing users of authentication and grading services and
(ii) to increase the use of our services by the numerous collectors that do
not currently use any independent third party authentication or grading
services.
Although
we have authenticated and graded over 15 million coins since the inception
of PCGS and over 11 million sportscards since the inception of PSA, we
estimate that less than 10% of the vintage United States coins and vintage
sportscards have been authenticated and graded. According to recent
data available on eBay’s websites, the number of coins being sold at any one
time on eBay generally ranges from approximately 105,000 to 150,000, of which
only approximately 13% are authenticated and graded by a third party
authentication and grading service, such as ours. Similarly, the number of
sportscards being sold at any one time on eBay generally ranges from
approximately 320,000 to 470,000, of which only about 10% are independently
authenticated and graded. Additionally, we estimate that we have
authenticated and graded less than 5% of the potential market of autographs and
stamps in the United States. Also, new collectibles are introduced
each year into the markets in which we operate, some of which are authenticated
and graded in the year of their introduction. Over time, these
collectibles will increase the supply of vintage items that are sold by dealers
and collectors and, which we expect will be submitted for independent third
party authentication and grading.
To take
advantage of these market opportunities, we have:
§
|
enhanced
our marketing programs to promote our brands and services directly to
Internet and other auction-related businesses. These programs
emphasize the benefits of using our services, including increased
marketability and the prospect of higher bids for
collectibles;
|
§
|
initiated
joint marketing programs with collectibles dealers that are designed to
make their customers aware of the availability and benefits of our
authentication and grading
services;
|
§
|
established
authorized PCGS and PSA dealer networks to increase the visibility of our
brands and the use of our services by those dealers and their
customers;
|
§
|
developed
and expanded our Set RegistrySM
programs to increase demand for our collectible coin, sportscard and stamp
authentication and grading services among collectors and to increase
traffic on our websites;
|
§
|
developed
and linked buying demand from our Set Registry program to Collectors
Corner in order to increase the referral of PSA sportscard buyers to
Collectors Corner dealer-subscribers, thereby enhancing the value of the
subscription and increasing the preference for PSA graded sportscards in
the market;
|
§
|
expanded
the offerings and markets in which Collectors Corner provides a
business-to-consumer website for the sale of third party products
certified by us; and
|
§
|
increased
the promotion of our Collectors Clubs to attract and to provide incentives
for collectors to use our services.
|
Expanding Services in our Existing
Markets. Using the brand recognition we have established in
the markets we serve, we have expanded services in our existing
markets. These services include:
§
|
Participation at Collectibles
Trade Shows. Each year we participate in approximately
40 collectibles trade shows that attract collectibles dealers and
collectors who buy and sell collectibles at those shows. At
some shows, we offer same day, on-site authentication and grading
services, which facilitate the trading and sales of collectibles at these
shows and conventions. At the same time, we obtain additional
brand exposure and generate increased revenues, because dealers and
collectors generally are willing to pay higher fees for same day, on-site
services. In July 2006, we acquired Expos Unlimited LLC
(“Expos”), a tradeshow management company that operates two well-known
coin, stamp and collectibles shows in Long Beach and Santa Clara,
California. This acquisition assures us of the continued
availability of the primary show venue in Long Beach for our
authentication and grading
services.
|
§
|
Sales of Website and Print
Advertising. We sell advertising in our publications and
on our websites to collectibles dealers and auctioneers in the markets in
which we offer our branded authentication and grading services. Due to the
increasing number of visitors to our websites, we are able to offer those
dealers and auctioneers the opportunity to market their products and
services to an increased number of prospective
customers.
|
§
|
Autograph Grading
Services. We launched autograph grading services,
beginning with single signed baseballs. Our autograph grading service
meets existing and creates additional demand for differentiation in the
quality, and thus in the value, of autographed memorabilia. Our grading is
based primarily on sharpness, intensity, readability and clarity of
autographs.
|
§
|
Expansion of Website Information
Services. We have been expanding the information
available on our websites, including the addition of: (i) historical coin
auction prices; (ii) reproductions of historical reference books; and
(iii) the contents of famous coin, sportscard and stamp
collections. These services are designed to attract new
collectors, increase the number of visitors to our websites and increase
advertising revenues. Currently, PCGS.com has, on average, over 500,000
visits, with over 2.7 million page views per month, and PSACARD.com has,
on average, over 180,000 visits, with over 1.5 million page views per
month.
|
§
|
eBay Promotional
Programs. Leveraging our expertise and reputation as a
leading independent third party authenticator and grader of high-value
collectibles, we work with eBay to create programs designed to increase
the marketability of collectibles on its auction websites and, at the same
time, promote our authentication and grading services. For example, we
introduced and provide a fee-based “Quick Opinion” autograph
authentication service to visitors on eBay’s sports memorabilia auction
website, whereby our autograph experts render an authenticity opinion
based on an examination of the digital image of the autograph posted on
eBay. We also have included information about the benefits of
our authentication and grading services on our websites, to which eBay has
placed links on its collectibles websites in order to make that
information readily accessible to its
users.
|
§
|
Set Registry Programs. We
have improved our Set Registry programs with an investment in software and
technology that drives the program on the separate websites of our
authentication and grading services. The Set Registry provides
a free Internet-based program to allow collectors in a specific market to
record their collection online in a chosen sub-market, such as Morgan
Dollars in coins or 1948 Bowman in sportscards and to compare their
collection in completeness and quality to all other similar collections
that are registered and receive a ranking of the participant’s registered
set. Each year, the Set Registry awards prizes for the highest
ranking sets and maintains a “Hall of Fame” for the best sets ever
assembled. To maintain the integrity of the program and to
provide a preference for our authentication and grading services, all of
the items in each registered set must have been authenticated and graded
by one of our authentication and grading services. Set Registry
is deployed by PCGS, PSA, PSE, and PCGS Currency. In
fiscal year ended June 30, 2008, the number of registered sets on our Set
Registries increased by 26%, 27%, 74% and 327%, in PCGS, PSA, PSE and PCGS
currency, respectively.
|
Increasing GCAL’s Share of the
Diamond Market. We believe that we can increase GCAL’s share
of the diamond grading market, notwithstanding competition from the larger and
more established grading services, such as GIA, by promoting GCAL’s
independence, its policy, practice and reputation for consistent and rigorous
application of diamond grading standards, the warranty of color and clarity
grades it issues, the security associated with the Gemprint of each GCAL
certified diamond which, among other benefits, deters switching of diamonds and
associated grading reports and the other services that GCAL is able to offer,
such as our grading guarantee, that are not available from its
competitors. Additionally, we believe that only about 50% of the
diamonds larger than 0.50 carat are offered with third party authentication and
grading services and we have found that many diamond retailers do not promote
the availability of diamond grading services and that the majority of consumers
do not request such services when purchasing diamonds. As a result,
we believe that the opportunity exists for us to grow the demand for GCAL’s
services and enable us to increase its market share. According to the
U.S. Geological Survey 2006 Minerals Yearbook, the United States imported 17
million carats of polished diamonds in 2006, of which 6.0 million carats were of
0.5 carats or larger.
To take
advantage of these opportunities, since acquiring GCAL, we have:
§
|
Enhanced
and established GCAL as a brand providing high quality and consistent
authentication and grading
services.
|
§
|
Provided
increased security for purchasers of diamonds by including, with each
diamond that is graded by GCAL, a “Gemprint” of the diamond, which is a
digital image of its unique refractive light pattern, using our patented
non-invasive diamond identification process. GCAL stores the
Gemprint in its computer database, cross-indexed to the diamond’s GCAL
grading certificate. As a result, if a dealer or consumer wants
to sell the diamond at a future date, the seller can provide the
prospective purchaser with evidence that the diamond being sold is, in
fact, the diamond that was originally graded by and described in the
grading certificate issued by GCAL, by (i) using the Gemprint process
to produce another digital image of the diamond at the time of sale and
(ii) comparing that digital image to one stored in GCAL’s
database. Consequently, the Gemprint process enables GCAL to
provide an additional measure of protection against misrepresentations of
diamond quality that can occur by, for example, switching a diamond
grading certificate issued for a higher quality diamond to a lower quality
diamond or by altering the grading
certificate.
|
§
|
Launched
the Five Star Diamond Grading Certificate that includes five distinct
services combined into one certificate at a 20% to 50% discount to the
fees that we believe the customer would have to pay to purchase these
services separately. GCAL’s Five Star certificate also means
that the customer need only keep a single grading certificate, rather than
having to maintain multiple grading certificates issued by the different
grading services. The five bundled services
include:
|
—
|
Direct Light Performance
Analysis, which is a service that directly measures the light
return from a diamond and expresses that return in calculations, of
Optical Brilliance and, Optical Symmetry, using descriptive terms from
Excellent, Very Good, and Good to Fair. These results are based
on the measurement of the number of pixels in light return from incident
light. The results are shown on the certificate in two digital
images of the diamond along with the two associated adjectival
descriptions for Brilliance and Symmetry. The easily understood
graphics and rating assist a potential diamond buyer in comparing the
visual qualities of one diamond to
another.
|
—
|
Gemprint Security
Registration, which is a service that captures the unique light
refraction pattern of a diamond in a digital format and records the unique
“fingerprint” of the diamond, and registers that image in a database,
which provides assurance that a GCAL certified diamond can be matched to
the original certificate, thereby making it possible to detect
misrepresentations of the quality of the diamond by mans of switching or
altering its grading certificates.
|
—
|
Laser Inscription,
which is a service that inscribes information using a cold laser on the
girdle of the diamond. Laser inscription is often used for quick
identification, engraving of logos or particular phrases. Laser
inscription is one of the most often requested extra services that is
included in the GCAL bundled
services.
|
Grading Guarantee, which is a
limited warranty that provides assurance to the diamond purchaser that if the
diamond is submitted for re-grading, within two years following the date of its
original examination (which may occur as a result of a resale of the diamond),
the color and clarity grades on the re-grading will be equal to the color and
clarity grades assigned on the diamond’s original grading. Due to the
grading process employed by GCAL, the grading experts who re-grade a diamond are
not able to determine the original grades assigned to the diamond and,
therefore, the rating assigned on re-grading cannot be affected by the original
grades given to the diamond. This guarantee is the first and only warranty
issued in the industry and provides the buyer with increased confidence in the
quality rating provided by GCAL. Fair and Consistent Clarity and
Color Certification, which is the result of the consensus process
employed by GCAL, where at least two qualified diamond experts must agree on the
subjective grading of Clarity and Color, two of the four “C’s” of diamond
grading. The other two “C’s” are Carat and Cut, both of which are measured by
high technology machines. Differences in one grade of Clarity or one
grade of Color may result in value differences in the marketplace from 10% to
50%.
§
|
Launched
the GemFactsSM
Digital Certification Data Delivery System, by which the information on a
GCAL grading certificate is delivered, digitally, on a mini-CD along with
the printed certificate at the time of retail sale or on the Internet in a
certificate look-up feature on the GCAL website. This digital
delivery system allows for co-marketing of certain diamond retail
programs, including co-branding with the retail seller and may include a
digital marketing video for the retail seller. Educational
“pop-up” windows are available when any one of 19 key terms are touched
with the cursor, making the GemFacts digital certificate interactive for
the user and a helpful sales tool at the retail
counter.
|
§
|
Launched
the Certified Diamond Exchange (CDE), an Internet based
business-to-business exchange exclusively for GCAL certified diamonds
(www.cdediamonds.com). The buyers and sellers on CDE register
for free. The buyers on CDE are generally retailers and jewelry
manufacturers, Wholesale sellers have listed for sale, on the
CDE, millions of dollars of GCAL certified diamonds and, on completion of
a sale, a seller generally will deliver the diamond via overnight delivery
directly to the buyer’s store or facility. There are over
30,000 retailers in the United States registered with the Jewelers Board
of Trade and, since its inception in November 2007, CDE has registered
over 2,000 buyers. The sellers on CDE are diamond dealers and
cutter/polishers who are currently not charged a fee for listing their
diamonds for sale on the CDE; however, they may only offer GCAL certified
diamonds for sale on the CDE. The CDE increases the
availability and distribution of CGAL certified diamonds and the increased
liquidity provided by the CDE creates an incentive for diamond sellers to
obtain GCAL diamond certifications so as to be able to offer their
diamonds for sale on the CDE.
|
§
|
Launched
separate services for Direct Light Performance and Gemprint Security
Registration that were previously only available as a part of the combined
services on a GCAL diamond grading certificate. The direct
light performance report offers information on the optical brilliance and
optical symmetry of a diamond that can assist a retailer in demonstrating
one of the most important points of differentiation between two or more
diamonds. The Diamond ID report offers a Gemprint of the
diamond and registration in our global database to assist in positive
identification of a diamond in the event it is lost or
stolen. The separate service not only provides an opportunity
for increased branding of GCAL on diamonds that trade in the marketplace
but also reinforces the value proposition of the bundled services
associated with the GCAL diamond grading
certificate.
|
■
|
Obtained
accreditation of GCAL operations from the International Organization for
Standards (“ISO”) under standard 17025:2005, which required GCAL to meet
the rigorous standards of the ISO relating to (a) management requirements
primarily with respect to the operation and effectiveness of the quality
management systems within GCAL's gemological laboratory, and (b) technical
requirements relating to the competence of GCAL's staff, methodologies and
test/calibration equipment. GCAL is now one of only three
diamond grading labs in the world and the only one in North America that
is accredited under ISO 17025:2005, although International Gemological
Institute in North America, and the Gemological Institute of America’s
(“GIA”) Gem Instruments Division are accredited under the less rigorous
ISO 9001 accreditation. We believe that, because the diamond grading
business is global and the majority of the authorized distributors
associated with the diamond mines are not domiciled in the United States,
and larger jewelry retailers realize that there can be marketing benefits
in using the services of an accredited gemological grading service, we
believe that ISO accreditation can be an important factor in the decisions
they make in selecting the authentication
and grading service they will use.
|
Increasing AGL’s Share of the
Colored Gemstone Market. We believe we can increase AGL’s
share of the colored gemstone authentication and grading market, because
authentication and grading services are requested on less than 1% of all the
colored gemstones purchased for $500 or more. According to the U.S.
Geological Survey 2006 Minerals Yearbook, imports into the United States of
colored gemstones in 2006 included 3.9 million carats of emeralds, 3.6 million
carats of rubies and 6.8 million carats of sapphires, along with 2.2 billion
carats of other colored gemstones. We estimate that, in the
high-value market served by auctioneers, such as Sotheby’s and Christie’s, third
party authentication and grading is requested by the auctioneers for 30% to 50%
of the colored gemstones sold at those auctions. We also estimate
that AGL’s share of the certification services purchased by sellers or
purchasers of colored gemstones at those auctions is approximately
30%. In the lower to middle value segment of the market, colored
gemstones are generally sold at retail in similar stores and venues as
diamonds. Although this selling environment is quite familiar with
the concept of third party authentication and grading of diamonds, retailers and
others in this segment of the market generally do not use any third-party
authentication and grading services for lower to middle value
gemstones. Further, the Federal Trade Commission has
promulgated
regulations, requiring retailers to disclose enhancements to colored gemstones
where those enhancements (a) are not, or may not be, permanent; (b) create
special care requirements; or (c) have a significant effect on the gemstone’s
value. Because most retailers do not have sufficient information or
expertise to make the determinations required to satisfy these Federal
disclosure requirements and retailers generally know that consumer
confidence is increased with third-party authentication and grading, we believe
we can increase our sales of our colored gemstone certification services by
offering an independent, third party certificate of color, tone and clarity,
with the required disclosures about enhancements, in this low to middle-value
segment of the colored gemstone market, priced at a level that makes it
economically feasible to have a larger number of such colored gemstones
authenticated and graded by us. In addition, we believe there is a
cross-marketing opportunity between GCAL and AGL through the marketing of (i)
AGL services to the retailers with which GCAL has existing relationships,
including Blue Nile, and (ii) GCAL services to the auctioneers and
retailers with AGL has existing relationships, such as Sotheby’s, Christie’s and
Cartier.
To take
advantage of these opportunities, since acquiring AGL, we have:
§
|
Increased
capacity and broadened the use of the AGL Prestige services for high
quality colored gemstones valued in excess of
$20,000.
|
§
|
Increased
the promotion and marketing of AGL’s Fast Track services which are
targeted to the market for colored gemstones valued at between $500 and
$20,000 where there has previously been little demand for and, therefore,
little competition in offering authentication and grading
services.
|
§
|
Sponsored
educational forums in conjunction with the Federal Trade Commission and
the Jewelers Vigilance Committee for the colored gemstone trade to explain
and describe the federal guidelines for disclosure of gemstone
enhancements. These forums are available online on the website
of AGL at www.aglgemlab.com
and DVDs have been distributed to many of the manufacturers, dealers and
retailers.
|
§
|
Developed
and in July 2008 launched, the Colored Gemstone Exchange (CGE) (www.cgegems.com),
an Internet based business-to-business exchange exclusively for gemstones
carrying AGL documents The buyers and sellers on CGE
register free. The buyers on CGE are generally retailers and
jewelry manufacturers. Gemstone dealers list for sale only
those gemstones for which they have obtained AGL documentation as to the
identification, weight, shape and enhancements. Of key
importance in this market is the inclusion of color images on the exchange
for each of those colored gemstones. Buyers have the
opportunity, via the CDE, to purchase these gemstones online directly from
wholesale sellers, who will generally deliver the gemstone via overnight
delivery directly to the buyer’s store or facility. The sellers
on CGE are gemstone dealers and cutter/polishers who are currently not
charged a fee for registering or offering gemstones on the exchange, but
may only offer and sell AGL-documented gemstones on the CGE. We
believe that the CGE will increase the availability and distribution of
many of the smaller colored gemstones valued from $500 to approximately
$20,000 that carry the new AGL Fast Track documentation and the increased
liquidity that is provided by the CGE creates an incentive for gemstone
sellers to obtain AGL Fast Track services on these smaller and less
valuable colored gemstones so as to be able to list those gemstones for
sale on the CGE.
|
Entering Other Collectibles and
High-Value Asset Markets. There are additional high-value
collectibles and high-value assets with respect to which marketability and value
depend primarily on their authenticity and state of preservation or
quality. We believe that the growth of some of these markets has been
hampered by the absence or limited availability of independent authentication
and grading services. Although we are currently focused on growing
our newer businesses in the diamond and colored gemstone markets, we continue to
evaluate opportunities with the intention to expand our business into one or
more of those markets. Other markets that we are considering for possible
expansion include:
Antique
silver
|
Musical
instruments
|
Art
|
Political
memorabilia
|
Art
glass
|
Postcards
|
Comic
books
|
Rare
books
|
Entertainment
memorabilia
|
Watches
|
Estate
jewelry
|
Wine
|
We intend
to consider the following criteria in selecting markets for future
expansion:
§
|
Market
Size. The size of the target market, measured both in
terms of the volume and the value of the collectibles or high-value assets
that trade in the market;
|
§
|
Trading
Prices. The prices at which collectibles or other
high-value assets trade in the target market, because we have found that
the more valuable the collectible or asset, the greater is the demand for
authentication and grading
services;
|
§
|
Competitive
Environment. The presence or absence of existing
independent authentication and grading services in the target market, its
capacity for new entrants and the satisfaction of dealers and collectors
with the services offered by existing
providers;
|
§
|
Availability of
Experts. The availability of experts needed to succeed
in entering a target market; and
|
§
|
Means of
Entry. The benefits and costs of entry by means of an
opportunistic acquisition, as opposed to starting a new authentication and
grading service that would require the development of a new
brand.
|
The
largest of these currently targeted markets are estate and pre-owned jewelry,
including watches, and entertainment memorabilia, such as Hollywood props,
scripts and wardrobes. According to data available from eBay, at any
one time there are approximately 300,000 to 500,000 items of entertainment
memorabilia and from 80,000 to 100,000 watches listed on eBay’s auction
websites. We are not aware of any significant third party
authentication or grading services in any of these markets.
There is
no assurance that we will succeed in expanding our business into any of these
new markets or, even if we do succeed in doing so, that the authentication or
grading services we will offer in those markets will gain market acceptance or
become profitable.
Operations
We offer
authentication and grading services for coins, sportscards, autographs and
autographed memorabilia, stamps, vintage U.S. and currency notes, and for
diamonds and colored gemstones. Our trained and experienced
authentication and grading experts determine the authenticity of and, using
uniform quality standards, assign a quality grade to these collectibles and to
diamonds and colored gemstones.
PCGS. Since our
inception in 1986, we have graded approximately 15 million coins. We now
authenticate and grade approximately 1.5 million coins per year. We typically
charge authentication and grading fees that range between $5 and $200 per coin,
depending primarily on the turn-around time requested by the customer, which
varies from one day for the highest level of service to approximately 60 days
for the lowest level of service. In the fiscal year ended June 30,
2008, our fee per coin averaged approximately $13.83. We authenticate
and grade coins in accordance with standards that we developed and which have
become generally accepted in the industry. We use both an adjectival and numeric
system, with a scale of 1-to-70, to rate the quality of the coins, with the
highest number representing “gem” or perfect quality. We have authenticated and
graded, either before or after sale, two of the three highest priced U.S. coins
ever sold at public auction, including an 1804 Draped Bust Silver Dollar, that
was sold by the owner at an auction in 1999 for approximately $4.1 million, and
a U.S. 1913 Liberty Head Nickel, that was recently sold for $4.15 million, the
second highest price paid for any coin.
Our
grading of coins involves an exacting and standardized process. We
receive coins from dealers and collectors and remove all packaging that
identifies the submitter in any way. We then enter information
regarding the coins into our proprietary computerized inventory system, which
tracks the coins at every stage of our authentication and grading
process. Generally, our process requires that two of our experts
evaluate each coin independently, and no authenticity opinion is issued and no
quality grade is assigned unless their opinions of authenticity and the grades
independently assigned by each of them are the same. In some
cases, depending on the type of coin being authenticated and graded or on the
results of the initial review process, a third expert is involved to make the
final determinations of authenticity and grade. The coin, the
determination of authenticity and its grade are then verified by one of our
senior experts, who has the authority to resubmit the coin for further review if
deemed to be necessary. Only after this process is complete is the coin reunited
with its invoice, thus keeping the authentication and grading process
independent of the identity of the owner and the history of the coin. The coin
is then sonically sealed in our specially-designed, tamper-evident, clear
plastic holder, which also encases a label describing the coin, the quality
grade that we have assigned to it, a unique certificate number and bar code, and
the PCGS hologram and brand name.
PSA. We launched
our PSA sportscard authentication and grading service in 1991 and, through June
30, 2008, had authenticated and graded over 11 million
sportscards. Our sportscard grading system uses both an adjectival
and a numeric system with a scale from 1-to-10, with the highest number
representing “mint” condition or perfect quality. We employ
sportscard authentication and grading procedures that are similar to our coin
authentication and grading procedures and at a minimum, two graders are assigned
to every card. On receipt of sportscards from dealers and collectors,
we remove all packaging that identifies the submitter in any way and enter
information regarding the sportscards into our proprietary computerized
inventory system that enables us to track the sportscards throughout our
authentication and grading process. Only after the authentication and
grading process is complete is the sportscard reunited with its invoice, thus
keeping the authentication and grading process independent of the identity of
the owner and the history of the sportscard. The sportscard is then
sonically sealed in our specially-designed, tamper-evident, clear plastic
holder, which also encases a label that identifies the sportscard, the quality
grade that we have assigned to it and a unique certificate number, and the PSA
hologram and brand name.
We
primarily authenticate and grade baseball sportscards and, to a lesser extent,
football, basketball and hockey sportscards, as well as entertainment and other
collectible cards. We typically charge fees ranging between $4 and
$50 per card, with an average fee of $5.76 per card in 2008. As is
the case with coin authentication and grading, sportscard authentication and
grading fees are based on the particular turn-around time requested by the
submitter, ranging from one day’s turn-around for the highest level of service
to approximately 60 days for the lowest level of service.
The
sportscards submitted to us for authentication and grading include primarily (i)
older or vintage sportscards, particularly of memorable or historically famous
players, such as Honus Wagner, Joe DiMaggio, Ted Williams and Mickey Mantle, and
(ii) modern or newly produced sportscards of current or new athletes who have
become popular with sports fans or have achieved new records or milestones, such
as Nolan Ryan and Roger Clemens. These sportscards have, or are
perceived to have, sufficient collectible value and are sold more frequently
than are sportscards of less notable athletes, leading dealers and collectors to
submit them for grading to enhance their marketability. Also, the
production and sale of each new series of sportscards, which take place at the
beginning and during the course of each new sports season, create new
collectibles that provide a source of future additional authentication and
grading submissions to us. Among the sportscards that we have
authenticated and graded is a 1909 Honus Wagner baseball card, which received a
PSA grade of NM-MT8 and was sold by the owner, via auction, in 2007 for
approximately $2.35 million and resold in September 2007 for $2.8
million.
PSA/DNA. In 1999, we
began offering authentication services for vintage sports
autographs. Because of the variability in the size of autographed
memorabilia, the procedures we use necessarily differ from those used in
authenticating and grading coins and sportscards. Customers may ship
the autographed memorabilia to us for authentication at our offices or, in the
case of dealers or collectors that desire to have a large number of items
authenticated, we will sometimes send an expert to the customer’s location for
“on-site” examination and authentication. Our experts reference what
we believe is one of the largest databases of known genuine examples of
signatures for comparison to a submitted specimen and draw
upon
their training and experience in handwriting analysis. In most cases, we take a
digital photograph of the autographs that we authenticate and store those
photographs in a master database. Before shipping the item back to
the customer, a tamper-evident label is affixed to the
collectible. The label contains our PSA/DNA name and logo and a
unique certificate number. For additional security, in all cases when
an item is fully authenticated, we tag the items with synthetic DNA-laced ink,
which is odorless, colorless and tasteless and visible only when exposed to a
narrow band wavelength of laser light using a hand-held, battery-powered lamp.
Additional verification can be obtained by a chemical analysis of the ink to
verify the unique DNA code used by PSA/DNA is, in fact, applied to the
item. As a result, if the label is removed from the item, it is still
possible to verify that the item was authenticated by us.
Memorabilia
that have been authenticated by our vintage autograph service include Mark
McGwire’s 70th home run baseball, which was sold at auction in 1999 for more
than $3 million, and the baseball bat, autographed by Babe Ruth, which he used
to hit the first home run ever hit in Yankee Stadium in 1923. That
bat recently was sold by Sotheby’s for more than $1.2 million.
We also
offer grading services for autographs. We use uniform grading
standards that we have developed to assign two grades to the collectible, one
based on the physical condition or state of preservation of the autograph, and
the other based on the physical condition of the collectible, using a numeric
scale of 1-to-10, the highest number representing “Gem Mint” condition or
perfect quality.
PSE. We commenced
our PSE stamp authentication and grading service in January 2000. In
rating the quality of stamps, we assign a numeric grade to each stamp that
ranges from 1-to-100. The grade assigned to a stamp is based on
several characteristics, including the centering of the image on the stamp and
the absence or presence of various faults, such as creases, perforation problems
and other imperfections that, if present, will reduce the value of the stamp.
For a stamp to receive a grade of 100, which means that it is in “gem”
condition, the image on the stamp must be perfectly centered and the stamp must
be faultless. Stamps submitted to us for grading are independently
examined and graded by at least two of our stamp experts. After a
stamp has been authenticated and graded, we generally issue a certificate of
authentication that briefly describes the stamp and the grade assigned to it and
has a digital image of the stamp attached. The certificate bears the
PSE name and logo and a unique certification number that we assign to the stamp
for record keeping purposes. We also offer our customers the option
of having the stamp encapsulated in a tamper-evident, clear plastic holder with
an encased label that, like the certificate, identifies the stamp and sets forth
the grade assigned to it, its unique certification number and the PSE name and
logo.
Stamps
that have been authenticated and graded by us include an 1868 1¢ “Z” Grill U.S.
postage stamp, which received a PSE grade of Extremely Fine (XF) 90 and was last
sold at auction in 1989 for more than $900,000. The owner submitted
the stamp to us shortly after we initiated our stamp authentication and grading
service in 2000.
The
volume of stamp authentication and grading submissions through fiscal 2007,
relative to the number of coin and sportscard submissions, has not been
material. Since stamp grading services are relatively new to the
market, we cannot predict when or even whether our services will gain the level
of market acceptance needed for stamp grading to become a material contributor
to our operating results.
Vintage U.S. Paper
Currency. PCGS began marketing a vintage U.S. paper currency
grading service, under the brand name “PCGS Currency” in the third quarter of
fiscal 2005. We have engaged a number of paper currency experts to
grow this business and to authenticate and grade vintage paper
currency. We use an adjectival and numeric grading system, with a
scale of 1-to-70, which is similar to the system that we use for grading coins,
largely because most vintage currency dealers are already familiar with that
system. Currently, there are two relatively small vintage paper
currency authentication and grading companies with which we compete, one of
which is a subsidiary of, Numismatic Guaranty Corporation of America, our
principal coin authentication and grading competitor, which started a separate
vintage paper currency authentication and grading service in the first calendar
quarter of 2005. The rare currency market is smaller than our other
collectibles markets and there is no assurance that our currency authentication
and grading service will gain broad market acceptance or that demand for such
services or our entry into that market will generate material revenues for us or
enable this service to become profitable.
Diamonds. GCAL was founded in
2001 and was acquired by the Company in the second quarter of fiscal
2006. We employ diamond grading experts and mineralogists to examine,
authenticate and grade diamonds. We use a combination of technology
and the application of industry standards in this process. To
authenticate diamonds, we use a Raman Spectrometer to examine the chemical
composition and Fourier Transform Infrared Spectrometer to assist in determining
various treatments that may be applied to diamonds.
In
addition, we use DiamondSure and DiamondView to verify diamonds and Sarin
instruments to weigh and measure the dimensions along with a Colorimeter to
assist in color grading. Experts review each diamond with respect to
established color reference sets and various magnification devices to closely
examine for imperfections and inclusions that would affect the clarity grade and
application of clarity standards. In addition to providing
information relative to the “4C’s” of diamond grading, we also provide a direct
measurement of light performance with technology acquired as part of the GCAL
acquisition, and we provide a registration of the Gemprint of each diamond using
the patented technology that produces, records, stores, sorts and matches
digital refractive images from a pinpoint, single laser light source applied to
the diamond.
GCAL assigns a quality grade to
the diamond by measuring its Cut, Carat, Color and Clarity (which are known as
the “4C’s” of the diamond). Cut and Carat are measured using
measurement equipment, while the Color and Clarity are determined by our experts
through the application of industry standards. Grades are applied
using a scale in Color from a top Color grade of “D” to a faint yellow lower
Color grade of “M” or lower, and a Clarity grade of “Flawless” (“FL”) to “Very,
Very Slightly Included 1” to “Very, Very Slightly Included 2” (“VS1” and “VS2”),
to the much lower quality grade of “Included 3” (“I3”).
In fiscal
2008, GCAL was accredited by the International Organization for Standards under
ISO 17025: 2005, the international standard for competence in a
laboratory. GCAL is currently the only diamond grading laboratory in
North America with the ISO 17025: 2005 accreditation and is one of only three in
the world.(although there are two other U.S. based gemological grading services
that have been accredited under the less rigorous ISO 9001
Standard). To be accredited under ISO 17025, a laboratory must
satisfy rigorous standards relating to (a) the operation and effectiveness
of the quality management systems within the laboratory, and (b) technical
requirements relating to the competence of its staff, methodologies and testing
and calibration equipment.
Colored
Gemstones. AGL was founded in 1977 and was acquired by the
Company in the first quarter of fiscal 2007. We employ colored gemstone
experts to examine, authenticate, grade, identify enhancements and determine the
country of origin. We utilize, in addition to industry standards and
various technologies, a combination of standards, systems and terminology that
were developed by AGL in grading and certifying colored gemstones. To
identify, authenticate and examine enhancements of colored gemstones, we use one
or more technologies including multi-channel spectroscopy, Fourier Transform
Infrared Spectrometer, Raman Spectrometer, x-ray fluorescence, ultra-violet near
visible infrared spectroscopy, specimen comparison and trace element comparison
to authenticate colored gemstones from our extensive reference collection of
over 5,000 samples. Weight is measured by technologically
sophisticated scales. Color and tone are reviewed by our experts to determine
the application of the three digit code for color and tone from a system we
developed called ColorScan. Color and hue are described on a numeric scale
from 1 to 10 in half point increments with tone set forth on a scale from 0-100.
Clarity is reviewed to determine the application of a scale using
descriptors such as “FI” meaning “Free from Inclusions”, to “MI1” and “MI2”
meaning “Moderately Included” to “E1”, “E2” and “E3” meaning “Excessively
Included”. A critical review of the stone for enhancements is completed
relying on the reference collection and other testing resulting in the use of
descriptions and disclosures that we developed. If requested, an analysis
of the country of origin is performed, comparing the subject stone and its trace
elements and crystalline structure to those in the reference
collection.
Publications and
Content. We publish authoritative price guides and rarity
reports for coins, sportscards, sports autographs and memorabilia and
stamps. This information is available on our website and in our
publications. These publications include:
§
|
Price
Guides. We provide a wide variety of authoritative price
guides for a number of collectible markets. For example, we track the
prices at which the 3,000 most actively-traded U.S. coins are sold, dating
back to 1970, and compile and publish this information in a generally
recognized collectible coin index, known as the CU3000.
|
§
|
Rarity
Reports. We compile and publish reports that list the
total number of coins and sportscards we have graded since our inception,
categorized by item type and grade determination. We can publish, for
example, the exact number of Mint State (MS) 67-grade 1881-S Morgan silver
dollars that we have graded. We believe that collectors use this
information to make more informed decisions regarding the purchase of
particular coins.
|
§
|
Articles. Collecting
is a passion for many and has nuances and anecdotes that are well suited
to a library of articles for each category of collectibles. We write
informative articles and publish them on our websites. A sense of
community is also important to collectors. We therefore encourage our
customers to communicate and to write articles which we sometimes publish
on our websites or include in our
publications.
|
§
|
Historical
Content. Collecting is often about history, and, in many
instances, historical events associated with a collectible enhance its
value. In our publications, we provide short histories about unusual and
rare collectibles. We believe that these historical accounts
add to the attractiveness and excitement of purchasing such
items. During 2004, House of Collectibles, a division of Random
House, published the second edition of the Official Guide to Coin Grading
and Counterfeit Detection, which was authored by our collectible
coin experts. To enhance the historical content that we are
able to provide dealers and collectors, in the first quarter of fiscal
2006 we acquired CoinFacts.com, which operates a website at
www.coinfacts.com, at which we are now able to offer coin dealers and
collectors proprietary information about the date and mintmark
combinations of U.S. Colonial Coins, early U.S. coins, such as the Liberty
Cap Half Cent of 1794, to the most recent U.S. minted coins, such as the
Fifty State Quarters™ and the One Ounce American Eagle Gold and Silver
Bullion Coins currently being produced by the U.S.
Mint.
|
§
|
News. We
provide market news and information that are accessible to collectors and
dealers on our websites. The news and information most often relate to
recent events, such as sales of collectibles at record prices, the
introduction of new collectibles and trends and developments in the
collectibles markets we serve.
|
Marketing
We employ
both “pull” and “push” strategies in marketing our services to dealers and
collectors of high-value collectibles and diamonds. For collectibles,
our “pull” strategies are designed to promote our brands and increase the
preference among collectors for our authentication and grading services and to
encourage collectors to communicate that preference to their collectibles
dealers, because most authentication and grading submissions are made by
dealers. In our experience, if a customer requests a particular
grading service, the dealer ordinarily will comply with that
request. On the other hand, if the customer expresses no preference,
the dealer will make its own choice of authentication and grading service or may
even decide not to submit the collectible to an independent service for
authentication and grading.
For
diamonds and colored gemstones, our “pull” strategy is designed to promote our
services and brands to the retail consumers who are interested in buying a
diamond or colored gemstone, principally by communicating over the Internet to
this target market through our websites, to which consumers are linked when
making search engine inquiries for information on diamonds or colored gemstones,
diamond and colored gemstone pricing, purchasing assistance and other
searches. We believe that our websites are distinctive because they
offer third party education, information and price guides that are not
associated with the sale of diamonds, diamond jewelry or colored gemstones and,
therefore, are attractive to consumers who are seeking independent and unbiased
information that will make them more educated and better
consumers. Since most diamond submissions come from diamond
“sightholders” (authorized buyers of rough diamonds from the mining companies)
and jewelry manufacturers, the objective of our “pull” strategy is to create
demand from retail consumers for our brand at the retail counter. For
colored gemstones, the supply chain is more diversified than for diamonds, but
the strategy to “pull” demand from the retailers and consumers is similar.
We believe that consumer demand will lead diamond and colored gemstone and
jewelry retailers to order diamonds, colored gemstones and diamond and colored
gemstones jewelry that have been graded by one of our services. In
addition, we promote our services to the many independent and chain store
retailers through trade publication advertising and trade show appearances to
demonstrate the benefits of selling diamonds and colored gemstones with our
diamond and colored gemstone grading certificates in order to encourage
retailers to ask for or even demand our brand of certification on diamonds and
colored gemstones and diamond or colored gemstone jewelry they purchase from
sightholders and wholesale distributors.
Therefore,
our “pull” oriented marketing programs emphasize (i) the protections that
collectors and retail customers will have if they purchase collectibles,
diamonds and colored gemstones that we have authenticated and graded, and
(ii) the improved marketability and higher prices that they and the
associated retailers can realize if they use our independent third party
authentication and grading services.
Our “Push” Strategy, on the
other hand, is designed to market our services directly to collectibles dealers
and to diamond sightholders, colored gemstone suppliers and diamond and colored
gemstone jewelry manufacturers to encourage them to use and promote our
services.
Our “Pull”
Strategy. We have developed and implemented a number of
marketing programs and initiatives designed to create consumer preference for
collectibles that have been authenticated and graded by us. Those
programs and initiatives include:
§
|
Direct
Advertising. We directly address collectors by
advertising our services in trade journals and periodicals in each of our
markets. Those journals include Coin World, Numismatic News
and Linn’s
Stamp News. We make personal
appearances at major, national-market trade shows around the United States
that are attended by collectors, as well as dealers. We also
participate in and support programs conducted by non-profit associations
whose members are primarily collectors, such as the American Numismatic
Association and the American Stamp Dealers
Association.
|
§
|
Set Registry
Programs. We provide collectors with the opportunity to
participate in free Internet “Set Registry” programs that we host on our
collectibles websites. These programs encourage collectors to
assemble full sets of related collectibles that have been authenticated
and graded by us. Generally, each registered set is comprised
of between 50 and 200 separate, but related,
collectibles. Examples include particular issues of coins, such
as Twenty Dollar Gold Double Eagles or Morgan Silver Dollars; particular
sets of sportscards, such as all Hall of Fame pitchers or a particular
team, like the 1961 Yankees; or sets of collectible stamps, such as
Columbian Commemoratives or Graf Zeppelin Airmail stamps. Our
Set Registry programs enable
collectors:
|
—
|
to
register their sets on our websites, which provides them with an off-site
reference source for insurance and informational
purposes;
|
—
|
to
display on our websites, and compare the completeness and quality grades
of, the collectibles making up their sets to those of other collectors who
have registered similar sets on our websites, thereby creating a
competitive aspect to collecting that adds to its excitement;
and
|
—
|
to
enter our annual Company-sponsored Set Registry competitions and awards
programs in which collectors can win awards for having collected the most
complete and highest graded sets of particular series or issues of coins,
sportscards or stamps.
|
The
collectibles that may be registered on our Set Registries and included in our
Set Registry competitions are limited to collectibles that have been
authenticated and graded by us. To register the collectibles to be
included in a particular set, a collector is required to enter the unique
certificate number that we had assigned to each of the collectibles when last
authenticated and graded by us. We use the certificate number to
compare the information being submitted by the collector with our database of
information to verify that the collectibles being registered by a participant
for inclusion in a particular set qualify to be included in that
set.
We have
found that our Set Registry competitions (i) create a preference and
increase demand among collectors for our brands, and (ii) promote the
trading of collectibles authenticated and graded by us by set registrants
seeking to improve the completeness and overall quality of their sets, which
generally results in additional authentication and grading submissions to
us. Annual awards for set completeness and quality have been issued
by PCGS and PSA each year since 2002 and by PSE beginning in 2004. As
an indication of the popularity of our Set Registry programs, more than 73,000
sets were registered on our Set Registries as of June 30, 2008, which represents
a 28% increase over the number registered as of June 30, 2007.
§
|
Collectors Clubs Subscription
Program. We also have established “Collectors Clubs” for
coin, currency and sportscard collectors. For an annual
membership fee, ranging from $50 to $230, collectors receive a number of
benefits, including (i) the right to have, without any further charge, a
specified number of collectibles authenticated and graded by us, a
privilege that non-member collectors do not have; and (ii) access to
certain proprietary data that we make available on our websites or in
print. As of June 30, 2008, there were approximately 18,000
members in our Collectors Clubs.
|
§
|
Certified Coin Exchange
Business-to-Business Website. The Certified Coin
Exchange (CCE) website, which we purchased in 2005, is a
business-to-business website for recognized dealers in the trade.
Currently, there are over 200,000 certified coins being offered at bid and
ask at an aggregate value of approximately $600 million, an increase in
excess of 100% of the number of items offered on average in the previous
year. The liquidity afforded the units traded on CCE increases
the demand for PCGS certified
coins.
|
§
|
Collectors Corner
Business-to-Consumer Website. We have launched
Collectors Corner (www.collectorscorner.com), which is a
business-to-consumer website where consumers can visit, identify, search,
sort over and select for purchase coins, sportscards and items of currency
that have been certified by us and are being offered for sale by
dealers. Currently, there are approximately 44,000 coins 32,000
sportscards and 1,400 items of currency listed for sale on Collectors
Corner. All items on Collectors Corner are offered
by dealer members who have applied for the right to offer such
collectibles on Collectors Corner. In addition, we launched the
functional ability for PSA Set Registry participants to automatically
search Collectors Corner for specific sportscards that would increase the
value of the participant’s set on our PSA Set Registry by either filling a
void in the participant’s set or by upgrading the quality of a sportscard
currently a part of the set. We believe that Collectors Corner
has advantages over other business-to-consumer websites because the
counterparties to the consumer have been accepted as sellers on the
Collectors Corner website and are known members of the marketplace and
selling community. Items listed are at fixed prices with the opportunity
to negotiate lower prices. We believe that the increased
turnover offered for items listed on Collectors Corner, as well as the
ability to use Collectors Corner to improve a sportscard set in the PSA
Set Registry, create increased brand preference for PCGS, PSA and PSE
authenticated and graded items.
|
§
|
Diamond Trade Buyer
Website. We have launched the GCAL diamond website,
which is directed to the trade to provide information on our services and
processes. The website includes details about our service
levels and our unique warranty and Gemprint application, along with videos
of our processes in the laboratory. During the twelve month
period ended June 30, 2008, we had (on average) approximately 1,200 unique
visitors a week to this trade-oriented
website.
|
|
Diamond Certificate
Co-Branding. GCAL has a program of co-branding the
diamond sightholder or the retailer on the GCAL diamond grading
certificate in order to provide point-of-sale support or after-sale
support for their brands once the consumer has taken the diamond
home. Diamond sightholders are requested by many diamond mining
interests to conduct marketing programs to “brand” a diamond from that
mining interest at the retail counter. Co-branding on the
diamond grading certificate is one of the most cost effective ways by
which a sightholder can brand the diamonds it purchases and
resells. Retailers are searching for various points of
differentiation in a sales presentation and co-branded diamond grading
certificates can create a point of differentiation between the retailer
and those of its competitors who are not using GCAL’s services.
Currently, GCAL has several co-branding programs in process
including programs with retailers Bailey Banks & Biddle, a unit of
Finlay Corporation and Blue Nile, and product manufacturer Vision Cut for
the Cushette brand diamond.
|
|
Certified Diamond Exchange
Business-to-Business Website. As previously discussed,
we launched the Certified Diamond Exchange (CDE), an Internet based
business-to-business exchange exclusively for GCAL certified
diamonds. The buyers and sellers on CDE may register with us,
for free, which entitles them to access and use the CDE to purchase GCAL
certified diamonds. The buyers on CDE are generally retailers
and jewelry manufacturers. Wholesale diamond sellers, comprised
primarily of diamond dealers and cutter/polishers, have listed millions of
dollars of GCAL certified diamonds for sale on the CDE. Upon
completion of a sale, the seller will generally deliver the diamond via
overnight delivery directly to the buyer’s store or
facility. There are over 30,000 retailers in the United States
registered with the Jewelers Board of Trade and, since inception of the
CDE in November 2007, over 2,000 jewelry retailers have registered to
access and purchase GCAL certified diamonds on the
CDE. Currently, we do not charge any fees for sellers to be
able to register to list or effectuate sales of diamonds on the CDE;
however, we do require that all diamonds that are listed on the CDE must
be GCAL certified. We believe that the CDE increases the
availability and distribution of GCAL certified diamonds and that, by
providing increased liquidity, creates an incentive for diamond sellers to
obtain GCAL certifications for their diamonds so as to be able to sell
them on the CDE.
|
§
|
Colored Gemstone Exchange Business-to-Business
Website. As previously discussed, we developed, and in
July 2008, we launched the Colored Gemstone Exchange (CGE), an Internet
based business-to-business exchange exclusively for gemstones carrying AGL
documents Membership on the CGE, which is free of charge,
entitles members to purchase AGL documented gemstones on the CCE. The
buyers on CGE are generally retailers and jewelry
manufacturers. Gemstone dealers list for sale on the CGE,
gemstones with AGL documentation as to the identification, weight, shape
and enhancements of the gemstones. Of key importance in this
market is the inclusion of color images on the exchange for each of the
gemstones, which facilitates the online sale and purchase of the
gemstones. Upon completion of a sale of a gemstone on the CGE,
the seller will generally deliver the gemstone via overnight delivery
directly to the buyer’s store or facility. The sellers on the
CGE are primarily gemstone dealers and
cutter/polishers. Sellers are currently not charged a fee for
registering or effectuating gemstone transactions on the
CGE. However, we require that all gemstones listed for sale on
CGE be AGL-documented. We believe that the CGE increases the
availability and distribution of many smaller colored gemstones, valued
from $200 to approximately $20,000, that carry the new AGL “Fast Track”
documentation and that, by providing increased liquidity, the CGE creates
an incentive for gemstone sellers to obtain AGL “Fast Track”
certification” on their smaller and less valuable colored gemstones so as
to be able to sell those gemstones on the
CGE.
|
Our “Push”
Strategy. We also market our services directly to collectibles
dealers and auctioneers to promote their use of our authentication and grading
services. Our marketing message is focused on the potential increase
in marketability of the collectibles due to the increase in consumer confidence
that is attributable to our authentication and grading of those
collectibles. These marketing programs include:
§
|
Trade Publication Advertising
and Direct Communications. We communicate to dealers and
auctioneers by direct contact and through advertising in trade journals
and publications in the respective markets. Those journals include Coin World, Numismatic
News and Linn’s Stamp
New. We also communicate with our dealers and with
auctioneers by direct mail, email, and
telephone.
|
§
|
Trade Shows and
Conventions. There are numerous collectibles trade shows
and conventions held annually in the United States, of which approximately
15 generally are considered to be the largest and most significant in the
collectible coin, sportscard, autograph and stamp markets. At
these shows and conventions, collectibles dealers gather on a trading
floor or “bourse” to buy and sell collectibles. We offer same
day, on-site authentication and grading services, which facilitate the
trading and sales of collectibles at these shows and
conventions. At the same time, we obtain additional brand
exposure and generate increased revenues, because dealers and collectors
generally are willing to pay higher fees for same day, on-site
services.
|
—
|
In
July 2006, we acquired Expos Unlimited LLC (“Expos”), a tradeshow
management company that operates two of the larger and better known coin,
stamp and collectibles shows in Long Beach and Santa Clara, California,
respectively. This acquisition assures us of the continued
availability of these two show venues for our onsite authentication and
grading services, provides us a platform for inaugurating and conducting
collectibles shows in our other markets and adds management personnel who
are experienced in managing and conducting collectibles trade
shows.
|
§
|
Authorized Dealer
Network. We have implemented authorized dealer programs
for coin and sportscard collectibles dealers and auction
companies. Authorized dealers are able to use our marketing
materials which are designed to promote our services and those of our
authorized dealers to collectors. Those materials include
“point of sale” and “point of purchase” displays and brochures and direct
mail pieces for insertion in customer mailings. In addition,
authorized dealers may use our brand logotypes on their websites to
attract buyers for coins and sportscards that have been authenticated and
graded by us. We also conduct joint marketing programs with our
authorized dealers in which we provide financial support for dealer
marketing programs, approved by us, that promote both the dealer’s
products and services and our authentication and grading
services.
|
§
|
Jewelry Trade Publication
Advertising, Trade Show Appearances and Educational Seminars. GCAL
advertises in the major jewelry trade publications and maintains an active
press relations campaign. GCAL also attends the major jewelry trade shows
primarily in the summer (targeted at the fall and holiday selling season)
and late fall and winter (targeted at the Valentine’s Day and Mother’s Day
season). GCAL also has the opportunity to hold educational seminars at
some of the trade shows and in-store training on grading issues and the
use of the GCAL diamond grading certificate in retail
transactions. Because colored gemstones are sold at retail
through virtually identical channels of distribution, AGL utilizes these
same communication channels in trade publications, trade show appearances
and educational seminars. This increased utilization of the existing
communications links, allows for significant synergy between GCAL and AGL
with respect to the time, energy, messaging and expenses in these
venues.
|
§
|
Cross-Marketing Between GCAL
and AGL. GCAL is
establishing relationships with retailers to provide diamond
authentication and grading services for the middle market. By
introducing the AGL brand to the retailers and drawing on the high value
brand recognition of AGL and a more value-driven pricing program, we
believe we can cross-market AGL services to the GCAL
relationships. At the same time, AGL has relationships with
some of the high value sellers like Sotheby’s and
Christie’s. By introducing GCAL to these high value sellers and
describing the benefits of GCAL certifications, including the grading
warranties offered by GCAL and the security benefits of Gemprint, we
believe we can cross-market GCAL to the AGL relationships. As a
result of those cross-marketing efforts, Christie’s, which is a long-time
AGL customer, will soon begin including, in its diamond auction
catalogues, descriptions or copies of GCAL grading certificates to promote
the sale of GCAL certified-diamonds at its
auctions.
|
eBay Promotional
Programs. Since 1999, we have worked with eBay on programs to
increase the volume of collectibles traded on eBay and, at the same time, to
provide greater exposure for our authentication and grading services. Current
programs include:
§
|
Informative and Educational
Web Pages. We have created web pages for eBay
specifically designed to inform and educate eBay buyers and sellers about
the benefits of our authentication and grading services. eBay includes, on
its collectibles web pages, links to our web pages and encourages its
collectibles customers to use our services. eBay has similar programs with
other collectibles authentication and grading
services.
|
§
|
Quick Opinion Autograph
Authentication Service. We have developed, for eBay’s
customers that visit its sports memorabilia auction website, a fee-based
“Quick Opinion” autograph authentication service. For a
prescribed fee, currently $7.49 per autograph, an eBay visitor that is
interested in selling or buying an autographed item of memorabilia on the
eBay auction website can obtain, from one of our autograph experts, a
“quick” opinion as to the authenticity of the autograph, generally
provided within a day of submission. The opinion is based on an
examination of a digital image of the autograph posted on eBay and, due to
the limitations inherent in this process, we do not warrant the accuracy
of these opinions. The fees generated by this service are
shared between us and eBay.
|
Intellectual
Property
Our
intellectual property consists primarily of trademarks, copyrights, proprietary
software and trade secrets. As part of our confidentiality procedures, we
generally enter into agreements with our employees and consultants and limit
access to, and distribution of, our software, documentation and other
proprietary information. The following table sets forth a list of our
trademarks, both registered and unregistered, that are currently being used in
the conduct of our business:
Registered
Marks
|
|
Unregistered
Marks
|
Collectors
Universe
|
|
World
Series of Grading
|
|
PSE
|
PCGS
|
|
CU3000
|
|
Coin
Universe
|
Professional
Sports Authenticator
|
|
PSE
|
|
Collectors.com
|
PSA
|
|
History
in Your Hands
|
|
Record
Universe
|
PSA/DNA
|
|
First
Strike
|
|
PCGS
Currency
|
Currency
Universe
|
|
Diamond
Market Monitor
|
|
Set
Registry
|
First
Strike
|
|
Diamond
Profile
|
|
Expos
Unlimited
|
Gemprint
Appraiser
|
|
Gemprint
|
|
Long
Beach Coin, Stamp and Collectibles Expo
|
Palmieri’s
Market Monitor
|
|
Professional
Currency Grading
|
|
Santa
Clara Coin, Stamp and Collectibles Expo
|
Quick
Opinion
|
|
Source
Veritas
|
|
|
Sports
Market Report
|
|
AGL
|
|
|
We have
not conducted an exhaustive search of possible prior users of the unregistered
trademarks listed above and, therefore, it is possible that our use of some of
these trademarks may conflict with others.
The
Company owns several patents related to the Gemprint process and scanning
device. The principal patent is number 5,828,405 issued by the United States
Patent and Trademark Office (“USPTO”) in 1998. Generally, this patent provides
for the capture of the unique optical response of a gemstone (or optical
“fingerprint”) where a laser beam is focused on the gemstone and the optical
response is recorded in a digital image. This is accomplished at a controlled
site, currently in the form of a small rectangular box about the size of a
breadbox, and connected to a desktop computer or other computing system for
receiving and displaying a data signal from a two dimensional video camera. The
two dimensional video camera id part of a light image capture arrangement
comprising a laser diode in combination with optical means for producing a
collimated light beam directed at a gemstone. The gemstone is oriented in a
predetermined manner relative to the light beam and a screen surface is located
to collect and display the unique light pattern from a gemstone. The video
camera directed at the screen surface is sized to collect the image in a digital
format and directs the data signal to the attached computing device. With a
communication link to a database through a local area network or through the
Internet, the digital image is stored in a standardized manner. In a similar
manner, subsequent digital images can be obtained and then compared using an
algorithm to those images on the database. Other related patents are 5,124,935
and 2,679,821 issued by USPTO and related patents filed in the United Kingdom,
Canada and Israel.
Collectibles
and Jewelry Experts
As of
June 30, 2008, we employed 59 experts in our authentication and grading
operations, who have from 2 to 51 years, and an overall average of 25 years, of
experience. Our experts include individuals that either (i) had
previously been collectibles dealers or were recognized as experts in the
markets we serve, or (ii) have been trained by us in our authentication and
grading methodologies and procedures, or in the case of diamonds, have been
trained in the vocational schools and/or had experience in grading in competing
organizations. However, talented authentication and grading experts
in collectibles are in short supply and there is considerable competition among
collectibles authentication and grading companies for their
services. As a result, we have recently increased our focus on
training young authenticators and graders who we believe have the skills or
knowledge base to become collectibles experts. We also sometimes
contract with outside experts, usually collectibles dealers, to assist us with
special grading issues or to enable us to address short-term increases in
authentication and grading orders.
Service
Warranties
We issue
an authenticity or grading warranty with every coin and sportscard authenticated
or graded by us. Under the terms of the warranty, if a coin or sportscard that
was graded by us later receives a lower grade upon resubmission to us for
grading, we are obligated either to purchase the coin or sportscard at the price
paid by the then-owner of the coin or sportscard or, instead, if we so choose,
to pay the difference in value of the item at its original grade as compared
with its lower grade. Similarly, if a coin or sportscard that has
been authenticated by us is later determined not to have been authentic, we are
obligated under our warranty to purchase the coin or sportscard at the price
that the then-owner paid for that collectible. We accrue for
estimated warranty costs based on historical claims
experience. Through September 30, 2007, our warranty reserves had
proved to be adequate. However, certain warranty claims were received
by us in the second quarter and early in the third quarter of fiscal 2008 that
were significant in relation to our historical claims experience and, as a
result, we recognized, in the second quarter of 2008, an additional expense of
$822,000 for those claims. We also decided to increase our warranty
accrual rate, effective January 1, 2008, to reflect this higher warranty claims
experience, and we will continue to monitor the adequacy of our warranty
reserves on an on-going basis. If warranty claims were to increase in
relation to historical trends and experience, management would be required to
increase the warranty reserves and incur additional charges that would have the
effect of reducing income in those periods during which the warranty reserve is
increased. Before returning an authenticated or graded coin or
sportscard to our customer, we place the coin or sportscard in a tamper-evident,
clear plastic holder that encapsulates a label identifying the collectible as
having been authenticated and graded by us. The warranty is voided in
the event the plastic holder has been broken or damaged or shows signs of
tampering.
We do not
provide a warranty with respect to our opinions regarding the authenticity or
quality of autographs.
We
recently began offering a warranty with respect to the color and clarity grades
assigned by GCAL to the diamonds it grades, which is the first such warranty
offered by any diamond grading service. Under the terms of the
warranty, if a diamond certified by GCAL is submitted for subsequent grading by
GCAL within two years of the date of the original certification (which often
occurs if the diamond is being sold), and, on that resubmittal receives a color
or clarity grade that is lower than its original color or clarity grade, we will
be obligated either to purchase the diamond at the price paid by the then-owner
of the diamond or, instead, if we so choose, to pay the difference in value of
the diamond at its original grade as compared with its lower grade.
Customer
Service and Support
We devote
significant resources, including a 23 person staff, to providing personalized
customer service and support in a timely manner handling approximately 380
customer service calls per day. On our websites, customers are able to
check the status of their collectibles submissions throughout the authentication
and grading process and to confirm the authenticity of the over 18 million
collectibles that we have graded. When customers need services or have any
questions, they can telephone or e-mail our support staff, Monday through Friday
between the hours of 7:00 A.M. and 5:00 P.M., Pacific Time. We also involve our
collectibles and diamond experts in providing support services when necessary to
address special issues.
Supplies
In order
to obtain volume discounts, we have chosen to purchase most of the
injection-molded plastic parts for our clear plastic holders principally from a
single supplier. There are numerous suppliers for these items,
however, and we believe that, if necessary, we could obtain those items from any
of those other suppliers without significant cost to us. However, if it were to
become necessary for us to obtain another supplier, we might have to arrange for
the fabrication of a die for the new supplier. Fabrication of high
precision dies can be a lengthy process. Therefore, it is our
practice to maintain at least a one month supply of these molded plastic parts
in inventory.
Competition
Coin Authentication and
Grading. We have three primary competitors in the coin
authentication and grading market: Numismatic Guaranty Corporation of America
(“NGC”), Independent Coin Grading and ANACS.
Sportscard Authentication and
Grading. We have two primary competitors in sportscard
authentication and grading: Beckett Sportscard Grading Corporation, and
Sportscard Guaranty, LLC.
Autograph Authentication and
Grading. In the vintage autograph authentication market, we
compete with James Spence Authentication (“JSA”) and a few smaller
competitors.
Stamp Authentication and
Grading. In stamp authentication, our principal competitors
are the Philatelic Foundation and the American Philatelic Society, both of which
are non-profit organizations. The Philatelic Foundation also grades
stamps.
Currency Authentication and
Grading. We have a major competitor in
currency: Paper Money Guaranty, (a subsidiary of NGC).
Diamond Authentication and
Grading. In the diamond grading market, we compete with ten
other grading services, several of which are larger, have been in business
longer and are better known than GCAL. Our principal competitors are
the Gemological Institute of America, a non-profit educational organization
(GIA); AGS Laboratories, an affiliate of the American Gem Society, a non-profit
trade association; European Gemological Laboratories; International Gemological
Institute; and Gemological Science International.
Colored Gemstone Authentication and
Grading. In the colored gemstone market, we compete with six or more such
services, some of which have operating histories longer than AGL. Our principal
competitors are Gubelin Gemological Laboratories, Schweizerische Stiftung für
Edelstein-Forschung (SSEF, or the Swiss Gemological Institute), a non-profit
organization, and Gemological Testing Center of the American Gem Trade
Association, a non-profit trade association.
The
principal competitive factors in our authentication and grading markets are
(i) brand recognition and awareness, (ii) an established reputation
for integrity, independence and consistency in the application of grading
standards, and (iii) responsiveness of service. Price is much
less of a factor in the case of vintage collectibles, but is a more important
consideration with respect to modern coins and sportscards because of their
significantly lower values. Price is a more important competitive
factor in the diamond market, due to the larger number of
competitors. Because the current market in colored gemstones
certification is primarily focused on high-value colored gemstones, price is not
as important a consideration as the credibility and history of the particular
grading service. We believe that our PCGS, PSA, PSA/DNA, PSE and PCGS
Currency brands compete favorably with respect to all of these factors and are
among the leaders in each of their respective markets. We believe that our
GCAL brand is a premium brand in the diamond market, interpreting the grading
standards in a rigorous and consistent manner, and one of the three or four top
quality brands, despite the fact that it is the smallest, in terms of the volume
of grading submissions, as compared to its principal competitors. We
believe that AGL is a premium brand and competes favorably with respect to all
of these factors.
Barriers
to entry into the authentication and grading market are relatively low,
especially in the sportscard authentication and grading
market. However, brand name recognition and a reputation for
integrity, independence and consistency in the application of grading standards
can take several years to develop. The limited supply of collectibles
experts also operates as a barrier to entry or expansion in our collectibles
markets. By contrast, the supply of grading experts in the diamond
and colored gemstone markets are much more plentiful. In colored
gemstones, the availability of a suitable and trusted reference collection is
essential to providing accurate enhancement and country of origin
analysis.
Information
Technology
We have
developed proprietary software systems for use in our authentication and grading
operations, principally for order tracking, processing and recordkeeping, as
well as for the operation and maintenance of our Internet websites. These
software systems include Grading Management and Production Systems, Set
Registry, Population Reports, Price Guides, Market Indexes, Article Libraries,
QuickOpinion Systems and Featured Dealer Systems. These applications are written
in Microsoft Visual Basic.NET, Microsoft C#, Microsoft ASP.NET and Microsoft SQL
Server. We also have legacy systems, which we are in process of replacing, in
Cold Fusion and Visual Basic 6. Additionally, we maintain an integrated local
area network that assists in and provides certain controls on production,
physical product movement, accounting and financial functions, data warehousing
and other tasks. During the fiscal year ending June 30, 2008, our
systems tracked the authentication and grading process, generating records and
data for over 3,000,000 collectibles submitted to us for authentication and
grading, without significant disruption or loss of service.
Although
we do not primarily conduct our business on the Internet, we do use the Internet
for information exchange and delivery of market-oriented content, as well as for
our Set Registry and certain of our other marketing programs. As a result, we
have over 55 Dell PowerEdge Servers with RAID protected storage, along with
multiple fully redundant SQL Server 2000 and 2005 high-availability database
clusters supporting over 10 terabytes of storage. The majority of this hardware
resides at our headquarters in a server room that has 24/7 environmental
monitoring and alerting through hardware sensors, 24/7 network availability and
performance monitoring and alerting through network management software and 24/7
Internet availability and performance monitoring and alerting through third
party providers. The Internet connectivity flows through multiple Internet
providers with an aggregate of 47 megabits of total Internet bandwidth using
multiple layers of Internet firewall protection, including 5 Cisco PIX firewalls
(across multiple locations). We maintain a multi-tiered antivirus
infrastructure. We use the FrontBridge Anti-Spam managed
service, which deploys multiple layers of technology to provide preventative and
protective spam defense. Critical systems are backed up nightly using a backup
infrastructure with a 30 terabyte capacity (expandable through drive upgrades to
hundreds of terabytes). The network servers and infrastructure are managed
by administrators certified by Microsoft, Cisco and CompTIA.
We have
limited redundancy with our remote computer systems in both the New York, NY and
Santa Barbara, CA offices. However, we do not have real-time fully
redundant computer systems at a location that is remote from Southern
California, where our primary computer systems currently are located. As a
result, any damage to or failure of our computer systems due to a catastrophic
event in Southern California, such as an earthquake, could cause an interruption
in our services.
Government
Regulation
With the
exception of laws in some states that require memorabilia authenticators to
certify to the accuracy of their authentication opinions, there are no material
government regulations specifically relating to the authentication and grading
businesses that we conduct, other than regulations that apply generally to
businesses operating in the markets where we maintain operations or conduct
business. However, our dealer finance program will be subject to
numerous laws and regulations in those states in which we may make loans to
dealers.
Disposition
of Collectibles Sales Businesses
During
the period from 1999 through the latter part of fiscal 2004, we also were
engaged in the business of marketing and selling collectible coins, sportscards,
currency and sports entertainment and historical memorabilia, primarily at
multi-venue auctions. We also sold collectible coins by direct sales
methods.
In
December 2003, we implemented a plan to focus our financial and management
resources, and collectibles expertise, on the operations and growth of our
authentication and grading businesses, and to divest the collectibles auctions
and direct sales businesses.
Employees
As of
June 30, 2008, we had 251 full-time employees and 37 part-time employees, of
which 199 were employed in our authentication and grading-related businesses,
including our 59 experts and 23 customer service and support personnel. The
other employees included 18 in information services, 5 in marketing, 3 in our
CCE subscription business, 24 in our Expos business, of which 23 were
part-time employees, and 39 in other business and administrative
services. We have never had a work stoppage, and no employees are
represented under collective bargaining agreements. We consider relations with
our employees to be good.
Our
business is subject to a number of risks and uncertainties that could prevent us
from achieving our business objectives and that could hurt our future financial
performance and the price performance of our common stock. Such risks
and uncertainties also could cause our future financial condition and future
financial performance to differ significantly from our current expectations,
which are described in the forward-looking statements contained in this Annual
Report. Those risks and uncertainties, many of which are outside of
our control, include the following:
A
decline in the popularity of high-value collectibles and a resulting decrease in
submissions for our services could adversely impact our business.
The
volume of collectibles submitted to us for authentication and grading is
affected by the demand for and market value of those collectibles. As
the demand for and value of collectibles increase, authentication and grading
submissions, as well as requests by submitters for higher price, faster
turn-around times, also increase. However, that also means that a
decline in popularity and, therefore in the value, of the collectibles that we
authenticate and grade would cause decreases in authentication and grading
submissions and in the requests we receive for faster turn-around times and,
therefore, also in our revenues and profitability. We have found,
over the years, that the popularity of collectibles can vary due to a number of
factors, most of which are outside of our control, including perceived scarcity
of collectibles, general consumer confidence and trends and their impact on
disposable income, precious metals prices, interest rates and other general
economic conditions.
Declines
in general economic conditions could result in decreased demand for our
services, which could adversely affect our operating results.
The
availability of discretionary or disposable income is an important factor in the
willingness and ability of collectors and consumers to purchase, and the prices
that they are willing to pay for, high-value collectibles, diamonds and colored
gemstones. Declines in purchases and sales, and in the value, of
collectibles, diamonds or colored gemstones usually result in declines in the
use of authentication and grading services, as such services are most often used
by sellers and purchasers of collectibles in conjunction with and to facilitate
sale and purchase transactions. As a result, economic uncertainties,
downturns and recessions can and do adversely affect our operating results by
(i) reducing the frequency with which collectibles dealers and collectors
submit their coins, sportscards and other collectibles for authentication and
grading; (ii) reducing purchases of diamonds and colored gemstones by
consumers, which would lead to a reduction in the number of diamonds and colored
gemstones submitted to us for grading; (iii) causing collectibles dealers
and collectors to request longer authentication and grading turn-around times
with respect to the collectibles they submit to us for grading, which would
reduce our revenues, gross profit margin and operating results, and
(iv) reducing the ability of customers to pay outstanding accounts
receivable.
Temporary
popularity of some collectibles may result in short-term increases, followed by
decreases, in the volume of submissions for our services, which could cause our
revenues to fluctuate.
Temporary
consumer popularity or “fads” among collectors may lead to short-term or
temporary increases, followed by decreases, in the volume of collectibles that
we authenticate and grade. These trends may result in significant
period-to-period fluctuations in our operating results and could result in
declines in our net revenues and profitability, not only because of a resulting
decline in the volume of authenticating and grading submissions, but also
because such trends could lead to increased price competition, which could
require us to reduce our authentication and grading fees in order to maintain
market share. For example, the number of coins submitted to us for
grading declined during 2008 and 2007 relative to 2006, due in part to a decline
in the popularity of certain coin grading programs.
Our
revenues and income depend significantly on revenues generated by our coin
authentication and grading services. A decrease in the level of
submissions for these services, which historically has been impacted by changes
in economic conditions, could adversely affect our revenues and results of
operations.
Coin
authentication and grading, related services and product sales accounted for
approximately 55%, 58% and 65% of our net revenues in fiscal 2008, 2007 and
2006, respectively. We believe fluctuations in coin grading
submissions can be due, at least in part, to (i) economic downturns which
can result in a decline in consumer confidence and disposable income and,
therefore, the willingness of dealers and collectors to buy collectible coins,
and (ii) the performance of the stock markets, the level of interest rates
and fluctuations in the value of the U.S. Dollar, which can lead investors to
shift some of their investments between stocks and bonds and precious
metals. The lack of diversity in our sources of revenues and our
dependence on coin grading submissions for a majority of our net revenues make
us more vulnerable to adverse changes in economic conditions. These
adverse changes include fluctuations in the value of precious metals or
recessionary conditions that could result in declines in collectibles
authentication and grading submissions generally or, more particularly, in
collectible coin submissions that would, in turn, result in reductions in our
total net revenues and operating results.
Our
top 6 customers, account for approximately 10% of our total net
revenues.
During
the year ended June 30, 2008, six of our coin customers accounted, in the
aggregate, for approximately 10% of our total net revenues. As a
result, the loss of any of those customers, or a lower level of grading
submissions by any of those customers, could cause our net revenues to decline
and, therefore, could harm our operating results. Our revenues from these
customers are also impacted by the level of submissions and revenue earned from
submissions at collectibles trade shows where we provide on-site grading and
authentication services to show attendees who typically request same-day
turn-around. The level of submissions at trade shows can vary
depending upon a number of factors, including the timing and number of the trade
shows conducted in any particular period, or short-term decisions made by
dealers during such trade shows. In addition, the level of our
revenues can be impacted by short-term changes in the price of gold that may
occur generally or around the time of the show, which can affect the volume of
coin transactions from these customers at the trade shows and which, in turn,
can affect the volume of submissions to us for on-site grading and same-day
turn-around at shows.
Our
diamond, colored gemstone and currency authentication and grading businesses are
in their start-up phases. There can be no assurance that these
businesses will prove to be successful.
We
purchased our diamond and colored gemstone grading businesses in November 2005
and August 2006, respectively, and we started our currency authentication and
grading business in March 2005. These businesses have yet to make a
material contribution to our net revenues. To date, our diamond,
colored gemstone and currency grading businesses have incurred significant
operating losses and we do not have, as of yet, an assurance that these
services will gain market acceptance or that these businesses will ever make a
material contribution to our net revenues or achieve
profitability. As a result, in accordance with applicable accounting
rules, in the fourth quarter of fiscal 2008, we determined that there had been
an impairment to these jewelry businesses, and we recorded a non-cash
impairment loss of approximately $11,232,000 with respect to the goodwill,
intangible assets and certain tangible assets of our diamond and colored
gemstone grading businesses. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS ─ Critical Accounting Policies and Estimates ─ Long-Lived Assets Other than
Goodwill and
Goodwill in Part II of this Report.
Future
acquisitions and the commencement of new businesses present risks, and we may be
unable to achieve the financial and strategic goals of any acquisition or
commencement of any new business.
One
component of our growth strategy is to acquire existing or to start new
businesses that serve other markets for other collectibles or high-value
assets. In fiscal 2006 we acquired four businesses, including a
diamond grading business, and in fiscal 2007 we acquired two other businesses, a
colored gemstone grading business and a trade show management
company. The purchase of these new businesses, present a number of
risks and uncertainties, including:
§
|
difficulties
in integrating newly acquired or newly started businesses into existing
operations, as a result of which we may incur increased operating costs
that can adversely affect our operating
results;
|
§
|
the
risk that our current and planned facilities, computer systems and
personnel and controls will not be adequate to support our expanded
operations;
|
§
|
diversion
of management time and capital resources from our existing businesses,
which could adversely affect their performance and our operating
results;
|
§
|
dependence
on key management personnel of acquired or newly started businesses and
the risk that we will be unable to integrate or retain such
personnel;
|
§
|
the
risk that new services we may introduce or begin offering, whether as a
result of internal expansion or business acquisitions, will not gain
acceptance;
|
§
|
competition
from established or larger competitors in new markets, such as in our
diamond grading business, which could adversely affect the financial
success and performance of any of the businesses we may have acquired or
started; and
|
§
|
the
risk that the anticipated benefits of any acquisition or of the
commencement of any new business may not be realized, in which event we
will not be able to achieve an acceptable return on our
investment.
|
There
are risks associated with new service offerings, with which we have little
experience.
We are
continually exploring new services that we might introduce and offer to our
existing authentication and grading customers as a means of increasing our net
revenues and profitability. Those new services, however, may prove to
be unprofitable and negatively impact our operating results.
We
are dependent on our key management personnel.
Our
performance is greatly dependent on the performance of our senior management and
certain other key employees. As a result, the loss of the services of
any of our executive officers or other key employees could harm our
business. Some of our executive officers and key employees are
experts in the collectibles markets and have industry-wide reputations for
authentication and grading of collectibles. In particular, the loss
of Michael R. Haynes, our Chief Executive Officer, or David G. Hall, our
President, could have a negative effect on our reputation for expertise in the
collectibles markets in which we operate and could lead to a reduction in
authentication and grading submissions to us.
We
are dependent on our collectibles experts.
In
certain of our markets, there are a limited number of individuals who have the
expertise to authenticate and grade collectibles, and competition for available
collectibles experts is intense. Accordingly, our business and our
growth initiatives are heavily dependent on our ability (i) to retain our
existing collectibles experts, who have developed relatively unique skills and
enjoy a reputation for being experts within the collectibles markets, and
(ii) to implement personnel recruiting, succession and training programs
that will enable us to add collectibles experts, as necessary, to grow our
business and offset employee turnover that can occur from time to
time. If we are not successful in retaining our existing collectibles
experts or in hiring and training new collectibles experts, this could limit our
ability to grow our business and adversely affect our operating results and
financial condition. Moreover, some of our experts could leave our
Company to join a competitor or start a competing business.
We
could suffer losses on authentication and grading warranties.
Certain
of our grading service businesses offer customers service
warranties. The warranties offered by our collectibles grading
businesses provide that:
§
|
if
any collectible we have authenticated and sealed in our tamper-evident
plastic cases is later determined not to have been genuine, we would have
to purchase the collectible at the price paid for it by its then owner;
and
|
§
|
if
any collectible that was graded by us and sealed in our tamper-evident
plastic cases later receives a lower grade upon resubmission to us for
grading, we would be obligated either to purchase the collectible at the
price paid by its then owner or to pay the difference in its value at its
original grade as compared to its value at the lower
grade.
|
GCAL, our
diamond grading subsidiary, offers a grading warranty which provides that, if a
diamond graded by us is submitted for re-grading within two years and, on
re-grading is assigned a color or clarity grade that is more than one grade
lower than the original color or clarity grade it received, GCAL will become
obligated to purchase the diamond at the price paid by its then owner or, if
GCAL so chooses, to pay the difference in its value at its original grade as
compared to its value at the lower grade.
We have
no insurance coverage for claims made under these warranties and, therefore, we
maintain reserves to satisfy such warranty claims based on historical
experience. However, there is no assurance that these warranty
reserves will prove to be adequate and, if they are not, our operating results
could be harmed and, therefore, we will continue to monitor the adequacy of our
warranty reserves on an on-going basis. During 2008, we unexpectedly
received certain coin grading warranty claims that were significant when
compared to our prior warranty claims experience. As a result, we
recognized, in the second quarter of 2008, an additional expense of $822,000 to
provide for those claims. In addition, effective January 1, 2008, we
increased our warranty accrual rate to reflect this higher warranty claims
experience. Those actions contributed to an increase in our costs of
sales and, therefore, to the operating loss we incurred for fiscal year
2008.
Increased
competition could adversely affect our financial performance.
Although
there are few major competitors in the collectibles authentication and grading
markets in which we currently operate, competition in these markets is,
nevertheless, intense. In addition, in the diamond market there are a
number of grading services that are substantially larger, have been in business
substantially longer and are better known than GCAL. Increased
competition in our collectibles markets could adversely affect our pricing and
profit margins and our ability to achieve further growth, and we cannot assure
that we will continue to be successful in competing against existing or future
competitors in our collectibles markets. In our diamond business, as
we implement its growth strategy, we are likely to encounter intense competition
from larger and more established competitors that have significant market
shares. Also, our entry into new collectibles or high-value asset
markets could lead other potential competitors to enter those markets as
well. Such competition could adversely affect our ability to generate
profits and could cause us to continue to incur losses in those markets and
damage our financial condition.
We
depend on our ability to protect and enforce our intellectual property
rights.
We
believe that our patents, trademarks and other proprietary rights are important
to our success and competitive position. We rely on a combination of patents,
trademarks, copyright and trade secret laws to establish and protect our
proprietary rights. However, the actions we take to establish and
protect our intellectual and other proprietary rights may prove to be inadequate
to prevent imitation of our services or products or to prevent others from
claiming violations of their intellectual and proprietary rights by us. In
addition, others may develop similar trade secrets or other intellectual
property independently or assert rights in our intellectual and other
proprietary rights that could lead them to seek to block sales of our services
based on allegations that use of some of our marks or other intellectual
property constitutes a violation of their intellectual property
rights.
Our
unregistered trademarks could conflict with trademarks of others.
We have
not conducted an exhaustive search of possible prior users of our unregistered
trademarks, including Coin Universe, Collectors.com and
PSE. Therefore, it is possible that our use of some of these
trademarks may conflict with others. As a result, we could face
litigation or lose the use of some of these trademarks, which could have an
adverse effect on our name recognition and result in a decrease in revenues and
an increase in expenses.
The
imposition of government regulations could increase our costs of doing
business.
With the
exception of state laws applicable to autograph authentication, the collectible
coin and other high-value collectibles markets are not currently subject to
direct federal, state or local regulation. However, from time to time
government authorities discuss additional regulations which could impose
restrictions on the collectibles industry, such as regulating collectibles as
securities or requiring collectibles dealers to meet registration or reporting
requirements, or regulating the conduct of auction
businesses. Adoption of laws or regulations of this nature could lead
to a decline in sales and purchases of collectibles and, therefore, also to a
decline in the volume of coins, sportscards and other collectibles that are
submitted to us for authentication and grading.
Our
reliance on a single source for principally all of our “tamper-evident,” clear
plastic coin and sportscard holders exposes us to potential supply and quality
problems.
We place
all of the coins, sportscards and currency notes, and sometimes also the stamps
that we authenticate and grade, in tamper-evident, clear plastic
holders. In order to take advantage of volume pricing discounts, we
purchase substantially all of those holders, on a purchase order basis, from one
principal supplier. Our reliance on a single supplier for a
substantial portion of those plastic holders exposes us to the potential for
delay in our ability to deliver timely authentication and grading services in
the event that supplier were to terminate its services to us or to encounter
financial or production problems. If, in such an event, we were
unable to obtain replacement holders in a relatively short period of time, we
could lose customer orders, or incur additional production costs. In
addition, if the replacement holders were not of comparable quality to our
existing supplier, we could expose ourselves to the potential for additional
warranty claims in the event that tampering with our holders was not
evident. These occurrences could cause a decline in our net revenues
and have a material adverse effect on our results of operations.
Our
computer and network systems may be vulnerable to unforeseen problems and
security risks, and we are vulnerable to system failure due to a lack of
redundant systems at another location.
Our
operations are dependent on our ability to protect our computer systems that we
use in our authentication and grading operations and to maintain our websites
against damage from fire, power loss, telecommunications failure, earthquakes
and similar catastrophic events. In this regard, Southern California,
where we are primarily located, is particularly vulnerable to earthquakes and
fires that could result in damage to our computer systems. In
addition, our diamond and colored gemstone operations are located in a New York
City high-rise building that could be vulnerable to terrorist attacks or to fire
or other disasters. We do not have redundant computer systems at any
locations that are remote from Southern California or New York. Any
damage to or failure of our computer systems could cause an interruption in our
services that could harm our business, operating results and financial
condition.
In
addition, our operations are dependent on our ability to protect our computer
systems and network infrastructure from damage that could occur from physical
break-ins, security breaches and other disruptive problems caused by the
technology that we employ in our operations. Computer break-ins and security
breaches also could jeopardize the security of information stored in and
transmitted through our computer systems and network infrastructure, which could
cause us to incur significant liability and possibly also damage our
reputation. Other disruptions due to problems on the Internet or
actions of Internet users could make it difficult for our customers to access
our websites. In either case, problems of this nature could adversely
affect our business and operating results, and security breaches that would
adversely affect the privacy of customer information could lead existing
customers to terminate their business relationships with us. Although
we intend to continue to implement and upgrade sophisticated technology to
prevent such disruptions and damage, there is no assurance that our security
measures will prove to be adequate or successful.
We
rely on third parties for various Internet and processing services.
Our
operations depend on a number of third parties for Internet access and delivery
services. We have limited control over these third parties and no
long-term relationships with any of them. For example, we do not own
a gateway onto the Internet, but, instead, rely on Internet service providers to
connect our website to the Internet. Should the third parties that we
rely on for Internet access or delivery services be unable to serve our needs
for a sustained time period as a result of a strike, natural disaster or other
reason, our revenues and business could be harmed.
We
are exposed to potential risks and we will continue to incur costs as a result
of the internal control testing and evaluation process mandated by Section 404
of the Sarbanes-Oxley Act of 2002.
Although
we have documented and tested the effectiveness of our internal controls over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of
2002, we expect we will continue to incur costs, including accounting fees and
other personnel costs in order to maintain compliance with that Section of the
Sarbanes-Oxley Act. Also, if our efforts to comply with new or
changed laws, regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to our practices, our
reputation may be harmed or we may be subject to litigation.
If
our quarterly results are below the expectations of securities market analysts
and investors or we decide to suspend or discontinue the payment of dividends,
the price of our common stock may decline.
Many
factors, including those described in this “Risk Factors” section, can affect
our business, financial condition and results of operations, which makes the
prediction of our future financial results difficult. These factors
include:
§
|
increases
or decreases in number of collectibles or diamonds graded from period to
period;
|
§
|
changes
in market conditions that can affect the demand for our authentication and
grading services, such as a decline in the popularity of certain
collectibles and volatility in the prices of gold and other precious
metals;
|
§
|
changes
in economic conditions that affect the availability of disposable income
among collectors and consumers; and
|
§
|
the
actions of our competitors.
|
If, as a
result of these or other conditions or factors, our quarterly operating results
fall below expectations or we decide to suspend or discontinue the payment of
dividends, securities market analysts may downgrade our common stock and some of
our stockholders may sell their shares, which could adversely affect the trading
prices of our common stock. Additionally, in the past, companies that
have experienced declines in the trading price of their shares due to events of
this nature have been the subject of securities class action
litigation. If we become involved in a securities class action
litigation in the future, it could result in substantial costs and diversion of
our management’s attention and resources, thus harming our
business.
No
assurance that we will continue to pay cash dividends.
In May
2006, our Board of Directors adopted a policy providing for the payment of cash
dividends, initially at a rate of $0.08 per share per quarter, which was
subsequently increased to $0.25 per share. As we disclosed
previously, the continued payment of cash dividends was subject to a number of
factors, including changes in market and financial conditions, and, therefore,
there could be no assurance that the amount of the Company's cash dividend would
not be reduced or the payment of cash dividends would not be suspended or
discontinued by the Board of Directors. On September 26, 2008, the
Board of Directors determined that, due to market and economic conditions,
including the liquidity crisis in the United States, the prudent course of
action would be, and the Board of Directors voted, to suspend the payment of
cash dividends in order to preserve the Company's cash resources to support the
continued implementation of the Company's strategic plan and the growth of its
business. At the same time, the Board of Directors approved
a 10% stock dividend on the Company's outstanding shares, commencing
in November, 2008. See "MARKET FOR COMMON STOCK AND RELATED
STOCKHOLDER MATTERS ─ Dividends" in Part II of this
Report.
Provisions
in our charter documents or in Delaware law may make an acquisition of us more
difficult or delay a change in control, which may adversely affect the market
price of our common stock.
Our
Amended and Restated Certificate of Incorporation and Bylaws contain
anti-takeover provisions, including those listed below, that could make it more
difficult for a third party to acquire control of us, even if that change of
control would be beneficial to our stockholders:
§
|
our
board of directors has the authority to issue additional common stock and
preferred stock and to determine the price, rights and preferences of any
new series of preferred stock without stockholder
approval;
|
§
|
there
are limitations on who can call special meetings of our stockholders;
and
|
§
|
stockholders
may not take action by written
consent.
|
In
addition, provisions of Delaware law and our stock option plans may also
discourage, delay or prevent a change in control of our Company or unsolicited
acquisition proposals.
None
We lease
approximately 59,000 square feet for our California-based headquarters under a
nine-year lease that commenced in November 2000. We currently
sublease 2,184 square feet of this office space to a related party sub-tenant
with an expiration date that coincides with the expiration of the Company's
nine-year lease. We lease approximately 7,300 square feet in New York
City in connection with our diamond grading business of which 5,000 square feet
is leased under an operating lease through December 31, 2015 and the balance
being leased on a month-to-month basis. For our colored gemstone
grading business, we currently lease 6,675 square feet under an operating lease
through December 2017 and 2,133 on a month-to-month basis until such time that
our new 6,675 square feet space is available for occupancy. In
connection with our Expos shows management business, we lease approximately
1,000 square feet in Santa Barbara, CA under a lease agreement with a related
party that commenced on July 1, 2006 and continues for a period of 3 years until
June 30, 2009.
Bill Miller v. Collectors
Universe, Inc. As previously reported, the Company was a
defendant in this legal action, which was brought in the Superior Court of
California, County of Orange, by Bill Miller, a former employee of the Company
and an expert in the authentication of autographs and memorabilia. In
his suit, Miller alleged that the Company had issued authentication certificates
bearing his name without his consent, in violation of a California statute
prohibiting unauthorized appropriation of a person’s name, signature or
likeness. The statute provides that a person whose name, signature or
likeness has been misappropriated, in violation of the statute, is entitled to
recover the greater of $750 or the actual damages suffered as a result of the
unauthorized use, and any profits that were attributable to that unauthorized
use that are not taken into account in computing the actual
damages. The Company denied Miller’s allegations and asserted that he
was not entitled to any recovery under the statute in excess of his actual
damages and that he had not suffered any actual damages as a result of the
issuance of the certificates.
Also, as
previously reported, at the conclusion of the trial, which took place in October
2005, (i) the jury found that the Company had used Miller’s name without
his consent on 14,060 authentication certificates, but that Miller had sustained
actual damages from that use totaling $14,060; and (ii) the parties entered
into a stipulated judgment in the case, which, among other things, provided that
Miller’s statutory damages arising from the actions of the Company were zero,
and the Company was entitled to recover $37,812 from Miller on a cross
complaint. The court left unresolved and for future determination the
issue of which party, if any, was the prevailing party in the lawsuit, which
would determine which party, if any, is entitled to recover its attorney’s fees
from the other party.
In March,
2005, Miller filed an appeal of the trial court’s ruling and the stipulated
judgment in which he sought, among other things, a finding that as a matter of
law he was entitled to statutory damages that should be determined by
multiplying $750 times the 14,060 authentication certificates on which his name
appeared without his consent, or approximately $10.5 million in
total.
On
February 1, 2008, the three-judge Appellate Court ruled unanimously in favor of
the Company, holding that (i) the use of Miller’s name by the Company
constituted, at most, a single violation of the statute in question and,
therefore, Miller was not entitled to multiply $750.00 by the number of times
his name was used as a measure of damages; and (ii) Miller had the right to
file a new trial in an effort to recover damages for the use by the Company of
his name; however, in that lawsuit he would have to prove that Collectors
Universe violated the statute at issue or common law and, if he succeeded in
proving such a violation, he would have to prove that he incurred actual damages
as a result of that violation in order to recover any amounts against the
Company.
In
February 2008, Miller filed a petition with the California Supreme Court seeking
a review and reversal of the Appellate Court’s decision. On April 23,
2008, the California Supreme Court denied Miller’s petition for
review. Miller has accepted the judgment for $14,060 plus $750
statutory damages.
However,
in August 2008, the Company and Miller reached a tentative settlement agreement
which provides for a complete release by each party of all known and unknown
claims it has or may have against the other relating to or arising out of the
subject matter of the suit, including the pending claims for recovery of its
legal fees and expenses. The documentation to give effect to the
settlement and mutual release has been prepared and is awaiting signature by the
parties. In the event that Miller does not to sign the documentation,
then, each party would be free to pursue its claims for recovery of its legal
fees and costs from the other party.
Other Legal
Actions
The
Company is named from time to time, as a defendant in lawsuits that arise in the
ordinary course of business. Management of the Company believes that
none of those lawsuits currently pending against it is likely to have a material
adverse effect on the Company.
None.
Name
|
|
Age
|
|
Positions
|
|
|
|
|
|
Michael
R.
Haynes
|
|
57
|
|
Chief
Executive Officer
|
David
G.
Hall
|
|
61
|
|
President
|
Joseph
J.
Wallace
|
|
48
|
|
Chief
Financial Officer
|
MICHAEL R. HAYNES has served
as Chief Executive Officer and a Director of the Company since January 1,
2003. He served as Chief Operating Officer, Chief Financial Officer
and Director of Tangible Asset Galleries, Inc, a distributor of fine art, from
2000 to 2002. He has been President, Chief Operating Officer and/or
Chief Financial Officer of eight collectibles, precious metals, specialty
retail, distribution, e-commerce and manufacturing
businesses. Overall, Mr. Haynes has more than 25 years of
experience in managing the growth and development of growth companies, which
includes over 19 years experience in managing both public and private companies
engaged in the business of selling collectibles at auction, retail and
wholesale. He was also one of the co-founding board members of the
Industry Council for Tangible Assets, a Washington, D.C. trade association for
dealers and auctioneers of tangible and collectible assets, where he served for
nine years. Mr. Haynes holds a Master's degree in Business and a
Bachelor of Science degree in mechanical engineering, both from Southern
Methodist University. He is a Certified Public Accountant and a
Certified Financial Planner.
DAVID G. HALL has served as
President of Collectors Universe, Inc. since September 2001. From
April 2000 to September 2001, Mr. Hall served as our Chairman of the Board and
Chief Executive Officer. Mr. Hall also served as Chairman of the
Board and a Director of Professional Coin Grading Services, Inc., the Company’s
predecessor, since it was founded in February 1986 and also served as its
President and Chief Executive Officer until January 1999. Mr. Hall
was honored in 1999 by COINage
Magazine as Numismatist of the Century, along with 14
others. In 1990, Mr. Hall was named an Orange County Entrepreneur of
the Year by INC.
magazine. In addition, he has written A Mercenary’s Guide to the Rare Coin
Market, a book dedicated to coin collecting. Mr. Hall is also
a member of the Professional Numismatists Guild.
JOSEPH J. WALLACE became the
Company’s Chief Financial Officer in September 2005. Prior to
becoming Chief Financial Officer, he was the Company’s Vice President of Finance
from November 2004 and Controller from June 2004. From 1997 to 2003,
Mr. Wallace was Vice President of Finance, Chief Financial Officer and Secretary
of STM Wireless, Inc., a public traded company engaged in the business of
developing, manufacturing and marketing satellite communications products and
services. Mr. Wallace is a Fellow of the Institute of Chartered
Accountants, a member of the Institute of Certified Public Accountants, in
Ireland, and a CPA in the State of California.
PART
II
Our
common stock is listed on the Nasdaq Global Market, trading under the symbol
CLCT. The following table sets forth the high and low closing prices
of our common stock, as reported by NASDAQ, and the cash dividends that we paid
to our stockholders, in each of the fiscal quarters in the fiscal years ended
June 30, 2008 and 2007:
Fiscal
2008
|
|
Closing
Share Prices
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Cash
Dividend
Per
Share
|
|
First
Quarter
|
|
$ |
15.80 |
|
|
$ |
12.99 |
|
|
$ |
0.25 |
|
Second
Quarter
|
|
|
14.05 |
|
|
|
10.49 |
|
|
|
0.25 |
|
Third
Quarter
|
|
|
12.26 |
|
|
|
8.75 |
|
|
|
0.25 |
|
Fourth
Quarter
|
|
|
10.56 |
|
|
|
8.11 |
|
|
|
0.25 |
|
Fiscal
2007
|
|
Closing
Share Prices
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Cash
Dividend
Per
Share
|
|
First
Quarter
|
|
$ |
14.28 |
|
|
$ |
12.28 |
|
|
$ |
0.08 |
|
Second
Quarter
|
|
|
14.39 |
|
|
|
12.34 |
|
|
|
0.08 |
|
Third
Quarter
|
|
|
14.21 |
|
|
|
12.73 |
|
|
|
0.12 |
|
Fourth
Quarter
|
|
|
15.29 |
|
|
|
13.46 |
|
|
|
0.12 |
|
The
Company had 77 holders of record and approximately 2,341 beneficial owners of
its common stock on June 30, 2008.
Dividends. On May
31, 2006, the Company adopted a dividend policy that called for the payment of
quarterly cash dividends of $0.08 per common share, for an expected annual cash
dividend of $0.32 per share. The quarterly cash dividend was
increased to $0.12 per share in the third quarter of fiscal
2007. Then, effective in the first quarter of fiscal 2008, the
quarterly cash dividend was increased to $0.25 per common share for an expected
annual cash dividend to stockholders of $1.00 per common share.
As we
disclosed previously, the continued payment of cash dividends was subject to a
number of factors, including the Company’s financial performance and changes in
market and financial conditions, and, therefore,
there could be no assurance that the amount of the cash dividend would not be
reduced or the payment of cash dividends would not be suspended or discontinued
by the Board of Directors. On September 26, 2008, the Board of
Directors determined that, due to market and economic conditions, including the
liquidity crisis in the United States, the prudent course of action would be,
and the Board of Directors voted, to suspend the future payment of cash
dividends in order to preserve the Company's cash resources to support the
continued implementation of the Company's strategic plan and the growth of its
business. At the same time, the Board of Directors approved a
10% stock dividend on the Company's outstanding shares, and it
declared that this dividend will be distributed on November 3, 2008 to all
stockholders of record on October 20, 2008.
Share
Repurchases
On
December 6, 2005, the Company publicly announced that its Board of Directors had
approved a stock buyback program that authorized the Company to make up to $10
million of stock repurchases in the open market or private transactions, in
accordance with applicable SEC rules. The Company is under no
obligation to repurchase any shares under this program, and the timing, actual
number and value of shares that may be repurchased under this program will
depend on a number of factors, including the Company’s future financial
performance, the Company’s available cash resources and competing uses for the
cash that may arise in the future, prevailing market prices of the Company’s
common stock and the number of shares that become available for sale at prices
that the Company believes are attractive. During the years ended June
30, 2008, 2007 and 2006, the Company repurchased and retired 232,152, 72,517 and
181,851 shares, respectively, for which it paid a total of approximately
$2,198,000, $945,000 and $2,618,000, respectively.
At June
30, 2008, the total dollar value of shares that could be purchased in the future
under this program was $4,239,000.
The
following table sets forth information regarding our share repurchases in each
of the months during the quarter ended June 30, 2008.
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
Monthly
Periods
Through
June 30, 2008
|
|
Total
Number
of
Shares Purchased
|
|
|
Average Price
Paid
per Share
|
|
|
Dollar
Value
of
Shares
Purchased
as
Part of Publicly
Announced
Program
|
|
|
Approximate
Dollar
Value
of Shares that
May
Yet Be
Purchased
under
the Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
1 to April 30, 2008
|
|
|
0 |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
5,116,308 |
|
May
1 to May 31, 2008
|
|
|
36,945 |
|
|
$ |
9.68 |
|
|
$ |
357,688 |
|
|
$ |
4,758,620 |
|
June
1 to June 30, 2008
|
|
|
53,331 |
|
|
$ |
9.74 |
|
|
$ |
519,496 |
|
|
$ |
4,239,124 |
|
Total
|
|
|
90,276 |
|
|
$ |
9.72 |
|
|
$ |
877,184 |
|
|
|
|
|
The
selected operating data for the fiscal years ended June 30, 2008, 2007 and 2006,
and the selected balance sheet data at June 30, 2008 and 2007 set forth below
are derived from the Company’s audited consolidated financial statements
included elsewhere in this Annual Report. The selected operating data
for the fiscal years ended June 30, 2005 and 2004 and the related balance sheet
data at June 30, 2006, 2005 and 2004 were derived from audited consolidated
financial statements that are not included in this Annual Report. The
following data should be read in conjunction with our consolidated financial
statements and the related notes thereto and with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included below in
this Annual Report.
During
the fiscal year ended June 30, 2006, we acquired four businesses, including Gem
Certification & Appraisal Lab, a gemological certification and grading
laboratory (“GCAL”) and substantially all of the assets of Gemprint Corporation
(“Gemprint”), consisting primarily of a patented technology for non-invasive
diamond identification which is used to digitally capture the unique refractive
light pattern (or “Gemprint”) of each diamond that is processed with that
technology. During the fiscal year ended June 30, 2007, we acquired
two additional businesses, including American Gemological Laboratories, an
international colored gemstone certification and grading
laboratory (“AGL”). The operating results of each of these
acquired businesses have been included in our consolidated results of operations
from the respective dates of their acquisition by us. See Item 7 -
MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — Our Business — Recent Acquisitions, below in
this report.
In the
third quarter of fiscal 2005, we completed a public offering in which we sold a
total of 2,195,856 shares of our common stock at a public offering price of
$17.50 per share. The net proceeds to us from the sale of the shares
in the offering, after payment of underwriting commissions and offering
expenses, were approximately $35,657,000.
As
previously disclosed, in December 2003 our Board of Directors approved, and
during the balance of fiscal 2004 we implemented, a plan to dispose of our
collectibles sales businesses. As a result, the consolidated selected
financial data set out below for the five years ended June 30, 2008 have been
restated to classify the assets and related liabilities of those businesses as
held for sale and the related operating results as discontinued
operations. In addition, in fiscal year 2006, discontinued operations
also included the operations of CTP, which was a business we acquired as part of
another acquisition and which we sold in November 2005.
|
|
Years
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Consolidated
Statement of Operations Data:
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
Net
revenues(1)
|
|
$ |
41,984 |
|
|
$ |
40,452 |
|
|
$ |
36,914 |
|
|
$ |
33,607 |
|
|
$ |
26,420 |
|
Cost
of revenues
|
|
|
23,773 |
|
|
|
19,297 |
|
|
|
14,890 |
|
|
|
12,239 |
|
|
|
10,322 |
|
Gross profit(1)
(2)
|
|
|
18,211 |
|
|
|
21,155 |
|
|
|
22,024 |
|
|
|
21,368 |
|
|
|
16,098 |
|
Selling,
general and administrative expenses
|
|
|
23,553 |
|
|
|
23,082 |
|
|
|
17,986 |
|
|
|
14,380 |
|
|
|
11,829 |
|
Impairment
losses(3)
|
|
|
11,233 |
|
|
|
55 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Amortization
of intangible assets
|
|
|
1,193 |
|
|
|
950 |
|
|
|
269 |
|
|
|
21 |
|
|
|
- |
|
Operating income
(loss)
|
|
|
(17,768 |
) |
|
|
(2,932 |
) |
|
|
3,769 |
|
|
|
6,967 |
|
|
|
4,269 |
|
Interest
income, net
|
|
|
1,117 |
|
|
|
2,144 |
|
|
|
2,346 |
|
|
|
906 |
|
|
|
135 |
|
Other
income (expense), net
|
|
|
5 |
|
|
|
6 |
|
|
|
22 |
|
|
|
26 |
|
|
|
(25 |
) |
Income
(loss) before provision (benefit) for income taxes
|
|
|
(16,646 |
) |
|
|
(782 |
) |
|
|
6,137 |
|
|
|
7,899 |
|
|
|
4,379 |
|
Provision
(benefit) for income taxes(4)
|
|
|
(1,016 |
) |
|
|
(39 |
) |
|
|
2,733 |
|
|
|
3,141 |
|
|
|
1,581 |
|
Income
(loss) from continuing operations
|
|
|
(15,630 |
) |
|
|
(743 |
) |
|
|
3,404 |
|
|
|
4,758 |
|
|
|
2,798 |
|
Income
(loss) from discontinued operations, net of gain
on sales of discontinued businesses (net of income taxes)
|
|
|
(2 |
) |
|
|
228 |
|
|
|
296 |
|
|
|
60 |
|
|
|
(1,068 |
) |
Net
income (loss)
|
|
$ |
(15,632 |
) |
|
$ |
(515 |
) |
|
$ |
3,700 |
|
|
$ |
4,818 |
|
|
$ |
1,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
(1.85 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.40 |
|
|
$ |
0.68 |
|
|
$ |
0.45 |
|
Income (loss) from discontinued operations, net of gain
on sales of discontinued businesses (net of income
taxes)
|
|
|
- |
|
|
|
0.03 |
|
|
|
0.04 |
|
|
|
0.01 |
|
|
|
(0.17 |
) |
Net
income (loss)
|
|
$ |
(1.85 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.44 |
|
|
$ |
0.69 |
|
|
$ |
0.28 |
|
Net
income (loss) per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$ |
(1.85 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.39 |
|
|
$ |
0.64 |
|
|
$ |
0.44 |
|
Income (loss) from discontinued operations, net of gain
on sales of discontinued businesses (net of income
taxes)
|
|
|
- |
|
|
|
0.03 |
|
|
|
0.03 |
|
|
|
0.01 |
|
|
|
(0.17 |
) |
Net
income (loss)
|
|
$ |
(1.85 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.42 |
|
|
$ |
0.65 |
|
|
$ |
0.27 |
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,450 |
|
|
|
8,367 |
|
|
|
8,473 |
|
|
|
7,013 |
|
|
|
6,170 |
|
Diluted
|
|
|
8,450 |
|
|
|
8,367 |
|
|
|
8,782 |
|
|
|
7,452 |
|
|
|
6,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends paid on common stock
|
|
$ |
8,517 |
|
|
$ |
3,350 |
|
|
$ |
674 |
|
|
$ |
- |
|
|
$ |
- |
|
Cash
dividends paid per share of common stock
|
|
$ |
1.00 |
|
|
$ |
0.40 |
|
|
$ |
0.08 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
At
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In
thousands)
|
|
Cash
and cash equivalents
|
|
$ |
23,345 |
|
|
$ |
42,386 |
|
|
$ |
52,110 |
|
|
$ |
65,439 |
|
|
$ |
21,454 |
|
Working
capital - continuing operations
|
|
|
26,006 |
|
|
|
42,208 |
|
|
|
54,812 |
|
|
|
68,576 |
|
|
|
22,308 |
|
Working
capital – discontinued operations
|
|
|
(9 |
) |
|
|
- |
|
|
|
75 |
|
|
|
338 |
|
|
|
991 |
|
Goodwill
and Intangibles – continuing
|
|
|
12,468 |
|
|
|
23,249 |
|
|
|
14,473 |
|
|
|
79 |
|
|
|
- |
|
Total
assets – continuing operations
|
|
|
52,018 |
|
|
|
78,101 |
|
|
|
78,138 |
|
|
|
75,123 |
|
|
|
32,690 |
|
Total
assets – discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
83 |
|
|
|
411 |
|
|
|
1,384 |
|
Stockholders'
equity
|
|
|
43,830 |
|
|
|
68,891 |
|
|
|
71,906 |
|
|
|
70,566 |
|
|
|
29,366 |
|
1.
|
Revenues
for FY2008 and 2007 include product revenues of $1,061,000 and $289,000,
respectively. In years 2004 through 2006, the level of product
sales was less than $50,000 in each year. Product revenues
represent the sale, primarily of coins, that are purchased under our
warranty policy and are not considered an integral part of our on-going
revenue generating activities. The gross profit on such product
sales in fiscal year 2008 and 2007 was 7% and 34%,
respectively.
|
2.
|
The
level of gross profit can vary depending upon the mix of revenues and
other factors. See “Factors Affecting Our Gross
Profit Margins” and “Results of Operation-Gross
Profit” under Item 7, Management Discussion and
Analysis of Financial Condition and Results of
Operations.
|
3.
|
Aggregate
impairment loss in 2008 of $11,233,000 consisting of $9,064,000,
$1,860,000, $176,000 and $133,000 for goodwill, intangible assets other
than goodwill, property and equipment, and other assets, respectively,
related to our jewelry division. See note 2 to Consolidated
Financial Statements under Item 8, Financial Statements and
Supplementary Data.
|
4.
|
The
income tax benefit for fiscal year 2008 is net of a valuation allowance of
$4,550,000. See note 2 to Consolidated Financial Statements
under Item 8, Financial
Statements and Supplementary
Data.
|
The following discussion and
analysis of our financial condition and results of operations should be read in
conjunction with the “Selected Consolidated Financial Data” and our Consolidated
Financial Statements and related notes, included elsewhere in Part II of this
Annual Report. This discussion also should be read in
conjunction with the information in Item IA of Part I of this Report, entitled
“Risk Factors,” which contains information about certain risks and uncertainties
that can affect our business and our financial performance in the future.
Introduction
and Overview
Our
Business
Collectors
Universe, Inc. (“we,” “us” or the “Company”) provides grading and authentication
services to dealers and collectors of high-value coins, sportscards, autographs,
stamps, and vintage U.S. currency notes and to sellers and purchasers of
diamonds and colored gemstones. We believe that our authentication
and grading services add value to these collectibles and to diamonds and colored
gemstones by enhancing their marketability and, thereby, providing increased
liquidity to the dealers, collectors and consumers that own, buy and sell
them.
We
generate revenues principally from the fees paid for our authentication and
grading services. To a much lesser extent, we generate revenues
from: the sale of advertising on our websites; the sale of printed
publications and collectibles price guides and advertising in such publications;
the sale of Collectors Club membership, subscriptions to our CCE
dealer-to-dealer Internet bid-ask market; for certified coins product revenues
that we generate from sales primarily of coins that we purchase under our
warranty policy, and revenues that we generate from the collectibles trade show
conventions that we conduct.
Recent Business
Acquisitions. On July 14, 2005 we purchased, for an aggregate
purchase price of $515,000, substantially all the assets of CoinFacts.com, which
operated an Internet website on which it published detailed proprietary
information and history on U.S. Coins.
On
September 2, 2005 we acquired, for an aggregate purchase price of $2,377,000,
the common stock of Certified Coin Exchange (“CCE”), which operates a
subscription-based dealer-to-dealer Internet bid-ask market for third party
certified coins.
On
November 8, 2005 we acquired Gem Certification & Appraisal Lab (“GCAL”), a
gemological certification and grading laboratory. As part of that
transaction, we also acquired Diamond Profile Laboratory, Inc. (“DPL”), a
scientific diamond light performance analysis laboratory, and all publishing and
other rights to “Palmieri’s
Market Monitor,” an educational and informative industry
publication. We paid an aggregate acquisition price of $3,268,000 in
cash for GCAL, DPL and the publishing and other rights to Palmieri’s Market
Monitor.
On
December 22, 2005 we acquired the business and substantially all of the assets
of Gemprint Corporation (“Gemprint”), consisting primarily of a patented
technology for non-invasive diamond identification which Gemprint uses to
digitally capture the unique refractive light pattern (or “Gemprint”) of each
diamond that is processed with that technology. We paid an aggregate
purchase price for Gemprint’s business and assets of $8,583,000 in cash, assumed
certain pre-acquisition liabilities and lease commitments, and agreed to pay
additional contingent purchase price of $1 for each diamond that we register
using the Gemprint process in excess of 100,000 registrations per year during
the five year period ending December 22, 2010.
Effective
July 1, 2006 we acquired, for an aggregate purchase price of $2,475,000 in cash,
all of the outstanding ownership interests of Expos Unlimited LLC (“Expos”), a
California limited liability company engaged in the business of owning and
conducting collectibles trade shows and conventions. Depending on the
future revenue performance of Expos, we may become obligated to make contingent
payments to the former owners of Expos up to an aggregate of $750,000 in July
2011. Expos owns and operates the Long Beach Coin, Stamp &
Collectibles Expo (“Long Beach”) and the Santa Clara Coin, Stamp &
Collectibles Expo (“Santa Clara”), which comprise, in total, five trade shows
that are held annually.
On August
18, 2006, we acquired American Gemological Laboratories (“AGL”), an
international colored gemstone certification and grading
laboratory. AGL is one of the leading third party authentication and
grading services for colored gemstones, including colored gemstones that are
sold at auction through Sotheby’s and Christie’s and by jewelry retailers such
as Cartier and Fred Leighton. We paid an aggregate acquisition price
of $3,947,000 in cash for AGL, and, depending on the future revenue performance
of AGL, we may become obligated to make payments of up to an aggregate of an
additional $3,500,000 over the next five years.
The
operating results of these acquired businesses have been consolidated into our
operating results from the respective dates of their acquisition
Discontinued
Operations. As previously disclosed, in fiscal 2004 our Board
of Directors authorized the divestiture of our collectibles auctions and sales
businesses. As a result, we sold our collectibles sales businesses
during that year, but retained the collectibles inventory and accounts
receivable of those businesses, which have since been substantially
liquidated. The activities resulting from the divestiture of those
businesses have been classified as discontinued operations and the discussion
that follows focuses almost entirely on our authentication and grading
businesses, which comprise substantially all of our continuing
operations.
Factors
That Can Affect our Financial Position and Operating Results
Factors that Can Affect our
Revenues. Our revenues are comprised of (i) fees
generated by the authentication and grading of high-value collectibles, and
other high value assets consisting of diamonds and colored gemstones, and
(ii) to a lesser extent, revenues from sales of collectibles club
memberships; advertising on our websites and in printed publications and
collectibles price guides; subscription-based revenues primarily related to our
CCE dealer-to-dealer Internet bid-ask market for collectible coins certified by
us; fees earned from the management, operation and promotion of collectibles
trade shows and conventions and revenues from sales of products, which consist
primarily of coins that we purchase under our warranty policy.
Our
authentication and grading revenues accounted for approximately 81%, 84% and 90%
of our total net revenues in the fiscal years ended June 30, 2008, 2007 and
2006, respectively. The amounts of such revenues are primarily
affected by (i) the volume and mix, among coins and sportscards, on the one
hand, and other collectibles and diamonds and colored gemstones, on the other
hand, of authentication and grading submissions; (ii) in the case of coins
and sportscards, the “turn-around” times requested by our customers, because we
charge higher fees for faster service times, and (iii) the mix of
authentication and grading submissions between vintage or “classic” coins and
sportscards, on the one hand, and modern coins and sportscards, on the other
hand, because dealers generally request faster turn-around times for vintage or
classic coins and sportscards than they do for modern submissions, as vintage or
classic collectibles are of significantly higher value and are more saleable by
dealers than modern coins and sportscards.
Six of
our coin authentication and grading customers accounted, in the aggregate, for
approximately 10% of our total net revenues in the fiscal year ended June
30, 2008. As a result, the loss of any of those customers, or a
significant decrease in the volume of grading submissions from any of them to
us, would cause our net revenues to decline and, therefore, could adversely
affect our results of operations. Our revenues from these customers
are also impacted by the level of submissions and revenue earned from
submissions at collectibles trade shows where we provide on-site grading and
authentication services to show attendees who typically request same-day
turn-around. The level of submissions can vary depending upon a
number of factors, including the timing of the shows or short-term decisions
made by dealers during shows. In addition, the level of our revenues
can be impacted by short-term changes in the price of gold that may occur around
the time of the show, which can affect the volume of coin transactions from
these customers at the shows and which, in turn, can affect the volume of
submissions to us for on-site grading and same-day turn-around.
Factors Affecting our Gross Profit
Margins. The gross profit margins on authentication and
grading submissions also are primarily affected by (i) the volume and mix,
among coins, sportscards and other collectibles and high value assets, of
authentication and grading submissions, because we generally realize higher
margins on coin submissions than on submissions of other collectibles and
high-value assets; (ii) in the case of coins and sportscards, the
“turn-around” times requested by our customers, because we charge higher fees
for faster service times, (iii) the mix of authentication and grading
submissions between vintage or “classic” coins and sportscards, on the one hand,
and modern coins and sportscards, on the other hand, because dealers generally
request faster turn-around times for vintage or classic coins and sportscards
than they do for modern submissions, and (iv) the stage of development and
the seasonality of our newly acquired businesses. Furthermore,
because a significant proportion of our direct costs are fixed in nature, our
gross profit is also affected by the overall volume of collectibles
authenticated and graded in any period.
Impact of Economic Conditions on
Financial Performance. We generate substantially all of our
revenues from the collectibles and the diamond and colored gemstone
markets. Accordingly, our operating results are affected by the
financial performance of those markets, which depends to a great extent on
(i) discretionary consumer spending and, hence, on the availability of
disposable income, (ii) on other economic conditions, including prevailing
interest and inflation rates, which affect consumer confidence, and
(iii) the performance and volatility of the gold and other precious metals
markets and the stock markets. These conditions primarily affect the
volume of purchases and sales of collectibles which, in turn, affects the volume
of authentication and grading submissions to us, because our services facilitate
commerce in collectibles. Accordingly, factors such as improving
economic conditions which usually result in increases in disposable income and
consumer confidence, and volatility in and declines in the prices of stocks and
a weakening in the value of the U.S. Dollar, which often lead investors to
increase their purchases of precious metals, such as gold bullion and other
coins and collectibles, usually result in increases in submissions of
collectibles for our services. By contrast, the volume of
collectibles sales and purchases and, therefore, the volume of authentication
and grading submissions, usually decline during periods characterized by
recessionary economic conditions and by declines in disposable income and
consumer confidence or by increasing stock prices and relative stability in the
stock markets.
The
following tables provide information regarding the respective number of coins,
sportscards, autographs, currency, diamonds and colored gemstones that we graded
or authenticated in the fiscal years ended June 30, 2008, 2007, and 2006 and
their estimated values, which are the amounts at which those coins, sportscards
and stamps and other high value assets were insured by the dealers and
collectors who submitted them to us for grading and authentication.
|
|
Units
Processed
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Coins
|
|
|
1,474,900 |
|
|
|
47 |
% |
|
|
1,558,700 |
|
|
|
50 |
% |
|
|
1,786,300 |
|
|
|
55 |
% |
Sportscards
|
|
|
1,329,500 |
|
|
|
42 |
% |
|
|
1,262,700 |
|
|
|
41 |
% |
|
|
1,200,300 |
|
|
|
37 |
% |
Autographs
|
|
|
199,600 |
|
|
|
6 |
% |
|
|
169,800 |
|
|
|
5 |
% |
|
|
179,700 |
|
|
|
6 |
% |
Stamps
|
|
|
53,000 |
|
|
|
2 |
% |
|
|
66,200 |
|
|
|
2 |
% |
|
|
37,000 |
|
|
|
1 |
% |
Currency
|
|
|
59,200 |
|
|
|
2 |
% |
|
|
36,200 |
|
|
|
1 |
% |
|
|
28,800 |
|
|
|
1 |
% |
Diamonds(1)
|
|
|
30,000 |
|
|
|
1 |
% |
|
|
25,000 |
|
|
|
1 |
% |
|
|
6,700 |
|
|
|
- |
|
Colored
Gemstones(2)
|
|
|
4,700 |
|
|
|
- |
|
|
|
2,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
3,150,900 |
|
|
|
100 |
% |
|
|
3,120,600 |
|
|
|
100 |
% |
|
|
3,238,800 |
|
|
|
100 |
% |
|
|
Declared
Values (000)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Coins
|
|
$ |
1,327,000 |
|
|
|
73 |
% |
|
$ |
1,435,000 |
|
|
|
82 |
% |
|
$ |
1,613,000 |
|
|
|
90 |
% |
Sportscards
|
|
|
90,000 |
|
|
|
5 |
% |
|
|
88,000 |
|
|
|
5 |
% |
|
|
75,000 |
|
|
|
4 |
% |
Autographs
|
|
|
26,000 |
|
|
|
2 |
% |
|
|
24,000 |
|
|
|
1 |
% |
|
|
15,000 |
|
|
|
1 |
% |
Stamps
|
|
|
25,000 |
|
|
|
1 |
% |
|
|
12,000 |
|
|
|
- |
|
|
|
21,000 |
|
|
|
1 |
% |
Currency
|
|
|
45,000 |
|
|
|
2 |
% |
|
|
32,000 |
|
|
|
2 |
% |
|
|
43,000 |
|
|
|
2 |
% |
Diamonds(1)
|
|
|
225,000 |
|
|
|
12 |
% |
|
|
97,000 |
|
|
|
6 |
% |
|
|
27,000 |
|
|
|
2 |
% |
Colored
Gemstones(2)
|
|
|
93,000 |
|
|
|
5 |
% |
|
|
62,000 |
|
|
|
4 |
% |
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
1,831,000 |
|
|
|
100 |
% |
|
$ |
1,750,000 |
|
|
|
100 |
% |
|
$ |
1,794,000 |
|
|
|
100 |
% |
1.
|
We
commenced the authentication and grading of diamonds in the second quarter
of 2006 when we acquired GCAL and
Gemprint.
|
2.
|
We
commenced the authentication and grading of colored gemstones in the first
quarter of 2007, when we acquired
AGL.
|
Overview
of Fiscal 2008 Operating Results
The
following table set forth comparative financial data for the years ended June
30, 2008 and 2007.
|
|
Year
Ended June 30, 2008
|
|
|
Year
Ended June 30, 2007
|
|
|
2008
vs. 2007
|
|
|
|
Amount
|
|
|
Percent
of Revenues
|
|
|
Amount
|
|
|
Percent
of
Revenues
|
|
|
Percent
Change
|
|
|
|
|
(Dollars
in thousands)
|
|
Net
revenues
|
|
$ |
41,984 |
|
|
|
100.0 |
% |
|
$ |
40,452 |
|
|
|
100.0 |
% |
|
|
3.8 |
% |
Cost
of revenues
|
|
|
23,773 |
|
|
|
56.6 |
% |
|
|
19,297 |
|
|
|
47.7 |
% |
|
|
23.2 |
% |
Gross
profit
|
|
|
18,211 |
|
|
|
43.4 |
% |
|
|
21,155 |
|
|
|
52.3 |
% |
|
|
(13.9 |
)% |
Selling
and marketing expenses
|
|
|
8,073 |
|
|
|
19.2 |
% |
|
|
7,497 |
|
|
|
18.5 |
% |
|
|
7.7 |
% |
General
and administrative expenses
|
|
|
15,480 |
|
|
|
36.9 |
% |
|
|
15,585 |
|
|
|
38.5 |
% |
|
|
(0.7 |
)% |
Impairment
losses
|
|
|
11,233 |
|
|
|
26.8 |
% |
|
|
55 |
|
|
|
0.2 |
% |
|
|
(20,323.6 |
)% |
Amortization
of intangible assets
|
|
|
1,193 |
|
|
|
2.8 |
% |
|
|
950 |
|
|
|
2.3 |
% |
|
|
25.6 |
% |
Operating
loss
|
|
|
(17,768 |
) |
|
|
(42.3 |
)% |
|
|
(2,932 |
) |
|
|
(7.2 |
)% |
|
|
(506.0 |
)% |
Interest
income, net
|
|
|
1,117 |
|
|
|
2.7 |
% |
|
|
2,144 |
|
|
|
5.3 |
% |
|
|
(47.9 |
)% |
Other
income
|
|
|
5 |
|
|
|
- |
|
|
|
6 |
|
|
|
- |
|
|
|
(16.7 |
)% |
Loss
before benefit for income taxes
|
|
|
(16,646 |
) |
|
|
(39.6 |
)% |
|
|
(782 |
) |
|
|
(1.9 |
)% |
|
|
(2,028.6 |
)% |
Benefit
for income taxes
|
|
|
(1,016 |
) |
|
|
(2.4 |
)% |
|
|
(39 |
) |
|
|
(0.1 |
)% |
|
|
(2,505.1 |
)% |
Loss
from continuing operations
|
|
|
(15,630 |
) |
|
|
(37.2 |
)% |
|
|
(743 |
) |
|
|
(1.8 |
)% |
|
|
(2,003.6 |
)% |
Income
(loss) from discontinued operations(1)
|
|
|
(2 |
) |
|
|
- |
|
|
|
228 |
|
|
|
0.5 |
% |
|
|
(100.9 |
)% |
Net
loss
|
|
$ |
(15,632 |
) |
|
|
(37.2 |
)% |
|
$ |
(515 |
) |
|
|
(1.3 |
)% |
|
|
(2,935.3 |
)% |
Net
loss per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(1.85 |
) |
|
|
|
|
|
$ |
(0.09 |
) |
|
|
|
|
|
|
(1,955.6 |
)% |
Income
from discontinued operations(1)
|
|
|
- |
|
|
|
|
|
|
|
0.03 |
|
|
|
|
|
|
|
- |
|
Net
loss
|
|
$ |
(1.85 |
) |
|
|
|
|
|
$ |
(0.06 |
) |
|
|
|
|
|
|
(2,983.3 |
)% |
(1)
|
Net
of gain on sales of discontinued businesses (net of income
taxes).
|
As the
above table indicates, we generated a 3.8% increase in net revenues in fiscal
2008, as compared to fiscal 2007 primarily as a result of increases in revenues
from (i) our non-grading service businesses, including increased
advertising revenues earned on our coin and sportscards publications and
increased revenues from our CFC financing
activities (“other-related businesses”), and (ii) sales of
collectible coins purchased by us under our coin grading warranty
policy. However, despite that increase in net revenues, we incurred
an operating loss of $17,768,000 in fiscal 2008, as compared to an operating
loss of $2,932,000 in fiscal 2007, due primarily to:
§
|
Increased
operating losses of $13,140,000 incurred by our diamond and colored
gemstones operations, including a $1,907,000 increase in losses from
on-going operations of those businesses and an impairment loss of
approximately $11,233,000 with respect to goodwill and other tangible and
intangible assets. Such impairment losses reflected a fair
value determination of these two reporting units at June 30, 2008;
and
|
§
|
A
$3,254,000 decrease in operating income generated by our coin grading
business in fiscal 2008, as compared to fiscal 2007, which was due
primarily to a decline in trade show revenues of approximately $1,500,000
in fiscal 2008, and higher costs of sales, which included warranty costs
of $822,000 recognized in the second quarter of fiscal 2008 as a result of
certain significant coin warranty
claims.
|
Partially
offsetting the operating losses attributable to the operations of our
authentication and grading businesses was a net improvement in the operating
results of our other related businesses and a lower level of unallocated
corporate costs. These, as well as other factors affecting our
operating results in the fiscal 2008 are described in more detail
below.
Critical
Accounting Policies and Estimates
General. In
accordance with accounting principles generally accepted in the United States of
America (“GAAP”), we record our assets at the lower of cost or fair
value. In determining the fair value of certain of our assets,
principally accounts and notes receivable and inventories, we must make
judgments, estimates and assumptions regarding circumstances or trends that
could affect the value of those assets, such as economic conditions or trends
that could impact our ability to fully collect our accounts receivable or
realize the value of our inventories in future periods. Those
judgments, estimates, and assumptions are based on current information available
to us at that time. Many of those conditions, trends and
circumstances, however, are outside of our control and, if changes were to occur
in the events, trends or other circumstances on which our judgments or estimates
were based, or other unanticipated events were to happen that might affect our
operations, we may be required under GAAP to adjust our earlier
estimates. Changes in such estimates may require that we reduce the
carrying value of the affected assets on our balance sheet (which are commonly
referred to as “write-downs” of the assets involved).
It is our
practice to establish reserves or allowances to record such downward adjustments
or “write-downs” in the carrying value of assets such as accounts and notes
receivable and inventory. Such write-downs are recorded as charges to
income or increases in expense in our statement of operations in the periods
when those reserves or allowances are established or increased to take account
of changed conditions or events. As a result, our judgments,
estimates and assumptions about future events and changes in the conditions,
events or trends upon which those estimates and judgments were made, can and
will affect not only the amounts at which we record such assets on our balance
sheet, but also our results of operations.
The
decisions as to the timing of adjustments or write-downs of this nature also
require subjective evaluations or assessments about the effects and duration of
events or changes in circumstances. For example, it is difficult to
predict whether events or conditions, such as increases in interest rates or
economic slowdowns, will have short or longer term consequences for our
business, and it is not uncommon for it to take some time after the occurrence
of an event or the onset of changes in economic circumstances for the full
effects of such events or changes to be recognized. Therefore,
management makes such estimates based upon the information available at that
time and reevaluates and adjusts its reserves and allowances for potential
write-downs on a quarterly basis.
During
fiscal year 2006 and in the first quarter of fiscal year 2007, we acquired
certain businesses and, in accordance with GAAP, we accounted for those
acquisitions using the purchase method of accounting. That accounting
method required us to allocate amounts paid for those businesses in excess of
the fair value of the assets acquired and the liabilities assumed, and to
classify that excess as goodwill. In accordance with GAAP, we
evaluate goodwill for impairment at least annually or more frequently if we
believe that goodwill has been impaired in the interim due to changing facts or
events (see “Goodwill” below). Other intangible assets that are
separable from goodwill and have definite lives are subject to amortization over
their remaining useful lives (see “Long-Lived Assets Other Than Goodwill”
below). Indefinite-lived intangible assets are subject to on-going
evaluation for impairment. Management formally evaluates the carrying
value of its goodwill and other indefinite-lived intangible assets for
impairment on the anniversary date of each of the business acquisitions that
gave rise to the recording of such assets. In the event it was
determined, from any such impairment analysis, that the estimated fair value of
any such assets had declined below their carrying value, we would be required to
recognize an impairment charge that would have the effect of reducing our income
in the period when that charge was recognized.
In making
our estimates and assumptions, we follow GAAP in order to enable us to make fair
and consistent estimates of the fair value of assets and to establish adequate
reserves or allowances for possible write-downs in the carrying values of our
assets.
Set forth
below is a summary of the accounting policies and critical estimates that we
believe are material to an understanding of our financial condition and results
of operations.
Revenue Recognition
Policies. We generally record revenue at the time of shipment
of the authenticated and graded collectible or high-value assets to the
customer. Due to the insignificant delay between the completion of
our grading and authentication services and the shipment of the collectible or
high-value asset back to the customer, the time of shipment corresponds to the
completion of our services. Many of our authentication and grading
customers prepay our authentication and grading fees when they submit their
collectible items to us for authentication and grading. We record
those prepayments as deferred revenue until their graded collectibles are
shipped back to them and our revenue generating activities are
complete. At that time, we record the revenues from the
authentication and grading services we have performed for the customer and
deduct this amount from deferred revenue. For certain dealers to whom
we extend open account privileges, we record revenue at the time of shipment of
the authenticated and graded collectible to the dealer as there is no
uncertainty surrounding the collection of receivables from these
customers.
With
respect to our Expos trade show business, we recognize revenue generated by the
promotion, management and operation of collectibles conventions and trade shows
in the periods in which the shows take place, which corresponds with the revenue
generating activities being complete.
A portion
of our net revenues is comprised of subscription fees paid by customers for
memberships in our Collectors Club. Those memberships entitle members
to access our on-line and printed publications and, sometimes also to vouchers
for free grading services from us. We record revenue for this
multi-element service arrangement in accordance with EITF 00-21, Accounting for Revenue
Arrangements With Multiple Deliverables, by recognizing approximately 60%
of the subscription fee in the month following the membership purchase, on the
basis that Collectors Club members typically utilize their vouchers for free
grading services within 30 days of subscribing for memberships. We
review this estimate at least semi-annually by recalculating the percentage
based on the relative values of the various elements in the Collectors Club
offering and determining the appropriate percentage to attribute to the grading
services and the remaining subscription. Our estimates have proven to
be consistently around 60% on an on-going basis. The balance of the membership
fee is recognized as revenue over the life of the membership, which can range
from one to two years.
We
recognize product sales when items are shipped and all the requirements of Staff
Accounting Bulletin No. 104, Revenue Recognition, issued
by the Securities and Exchange Commission (“SEC”), have been
satisfied. Product revenues sold consist primarily of collectible
coins that we purchased pursuant to our coin authentication and grading warranty
program and are not considered an integral part of the Company’s on-going
revenue generating activities.
Accounts Receivable, Notes
Receivable and the Allowance for Doubtful Accounts. In the
normal course of our authentication and grading business, we extend payment
terms to many of the larger, more creditworthy dealers or distributors who
submit collectibles or diamonds or colored gemstones to us for authentication
and grading on a recurring basis. In addition, primarily in
connection with our coin dealer financing programs, we make advances or extend
credit under notes receivable arrangements. We regularly review our
accounts and notes receivable, estimate the amount of, and establish an
allowance for, uncollectible amounts in each quarterly period. The
amount of that allowance is based on several factors, including the age and
extent of significant past due amounts, and in the case of notes receivable, the
current value of the collateral we hold as security for the payment obligations
under the notes receivable, and known conditions or trends that may affect the
ability of account debtors or note obligors to pay their accounts or notes
receivable balances. Each quarter we review estimates of
uncollectible amounts and such economic or other conditions or trends in order
to enable us to determine whether or not to adjust the amount of the
allowance. For example, if the financial condition of certain dealers
or economic conditions were to deteriorate, adversely affecting their ability to
make payments on their accounts or notes, increases in the allowance may be
required. Since the allowance is created by recording a charge
against income that is reflected in general and administrative expenses, an
increase in the allowance will cause a decline in our operating results in the
period when the increase is recorded.
Inventory Valuation
Reserve. Our collectibles inventories are valued at the lower
of cost or fair value and have been reduced by an inventory valuation allowance
to provide for potential declines in the value of those
inventories. The amount of the allowance is determined and is
periodically adjusted on the basis of market knowledge, historical experience
and estimates concerning future economic conditions or trends that may impact
the sale value of the collectibles inventories. Additionally, due to
the relative uniqueness of some of the collectibles included in our collectibles
inventory, valuation of such collectibles often involves judgments that are more
subjective than those that are required when determining the market values of
more standardized products due to volatility in the price of precious metal, the
condition of the collectible and any specific features of the individual
collectible. We review the market values of the collectible on a
quarterly basis. Ultimately, we recognize a profit or loss on the
actual sale of the collectible relative to its most recent inventory carrying
value. Our estimates of market values have proven to be reasonably
accurate in the past.
If there
were to be an
economic downturn or there were to occur other events or
circumstances that are likely to make it more difficult to sell, or that would
lead us to reduce the sales prices of, those collectibles, it
may become necessary to increase the reserve. Increases in this
reserve will cause a decline in operating results, because such increases are
recorded by charges against income.
Grading Warranty
Costs. We offer a limited warranty covering the coins,
sportscards, stamps and currency that we authenticate and
grade. Under the warranty, if any such collectible that was
previously authenticated and graded by us is later submitted to us for
re-grading and either (i) receives a lower grade upon resubmittal or
(ii) is determined not to have been authentic, we will offer to purchase
the collectible or, at our option, pay the difference in value of the item at
its original grade as compared with its lower grade. However this
warranty is voided if the collectible, upon resubmittal to us, is not in the
same tamper-resistant holder in which it was placed at the time we last graded
the item. If we purchase an item under a warranty claim we recognize,
as a reduction in our warranty reserve, the difference in value of the item at
its original grade and its re-graded estimated value. We include the
purchased item in our inventory at the re-graded estimated value of the
item. We offer a similar limited warranty of two years’ duration on
the diamonds we grade. We accrue for estimated warranty costs based
on historical trends and related experience. Through September 30,
2007, our warranty reserves had proved to be adequate. However,
certain warranty claims were received by us in the second quarter and early in
third quarter of fiscal 2008 that were significant in relation to our historical
claims experience and, as a result, we recognized, in the second quarter of
2008, an additional expense of $822,000 for those claims. We also
decided to increase our warranty accrual rate, effective January 1, 2008, to
reflect this higher warranty claims experience, and we will continue to monitor
the adequacy of our warranty reserves on an on-going basis. If
warranty claims were to increase in relation to historical trends and
experience, management would be required to increase the warranty reserves and
incur additional charges that would have the effect of reducing income in those
periods during which the warranty reserve is increased.
Long-Lived Assets Other Than
Goodwill. We regularly conduct reviews of property and
equipment and other long-lived assets other than goodwill, including certain
identifiable intangibles, for possible impairment. Such reviews occur
annually or more frequently if events or changes in circumstances indicate the
carrying amount of the asset may not be recoverable in full. In order
to determine if the value of a definite-lived asset is impaired, we make an
estimate of the future undiscounted cash flows expected to result from the use
of that asset and its eventual disposition in order to determine if an
impairment loss has occurred. If the projected undiscounted cash
flows are less than the carrying amount of the asset, an impairment loss is
recorded to write down the asset to its estimated fair value. Based
on such reviews, we determined that impairment losses occurred in fiscal year
2008 in the amounts of approximately $176,000 for property and equipment,
$1,860,000 for intangible assets other than goodwill, and $133,000 for other
assets in relation to our jewelry businesses. During fiscal year 2007, we
recorded impairment losses of $25,000 for equipment, and $16,000 for intangible
assets in relation to our jewelry businesses and $14,000 in equipment unrelated
to our jewelry businesses. Because the Company has incurred significant
operating losses in its jewelry reporting units since the acquisitions of these
businesses and has recognized impairment losses at June 30, 2008, management
intends to closely monitor the performance and future prospects of these units
for further impairment. Due to the early stage of the jewelry
businesses, significant risk and uncertainty exists around estimating the level
and timing of future revenues of these businesses. Such estimates of
revenue will significantly impact the expected level of future cash flows from
those businesses, which is used in determining whether the fair value of those
businesses are less than the carrying amount of the assets of those
businesses. It is possible that the Company may need to record additional
impairment losses as a result of testing these or other units for impairment
during the annual impairment tests or on an interim basis if a triggering event
occurs.
Goodwill. We test the
carrying value of goodwill and other indefinite-lived intangible assets on a
formal basis at least annually on their respective acquisition anniversary
dates, or more frequently if indicators of impairment are determined to exist.
We apply a discounted cash flow model or an income approach to determining a
fair value that is used to estimate the fair value of the reporting unit on a
total basis, which is then compared to the carrying value of the reporting
unit. If the fair value of the reporting unit exceeds the carrying
value of the reporting unit, no impairment of goodwill exists as of the
measurement date. If the fair value is less than the carrying value, then there
is the possibility of goodwill impairment and further testing and remeasurement
of goodwill is required. In accordance with GAAP, we consider the diamond and
colored gemstone grading businesses as separate reporting units for the purpose
of testing separately for the impairment of goodwill. As a result of
the occurrence of losses in prior fiscal periods in our jewelry reporting units
and the uncertainty of the timing of future revenues and related cash flows, we
concluded during the fourth quarter of 2008 that such indicators of impairment
did exist in our diamond and colored gemstone grading reporting units at June
30, 2008, which resulted in impairment losses related to goodwill recorded on
the Consolidated Statements of Operations for the fiscal year ended June 30,
2008 in the amounts of approximately $7,267,000 for the diamond grading
reporting unit and approximately $1,797,000 for the colored gemstone reporting
unit. Because the Company has incurred significant operating losses in its
jewelry reporting units since the acquisitions of these businesses and has
recognized impairment losses at June 30, 2008, management intends to closely
monitor the performance and future prospects of these units for further
impairment. Due to the early stage of the jewelry businesses,
significant risk and uncertainty exists around estimating the level and timing
of future revenues of these businesses. Such estimates of revenue will
significantly impact the expected level of future cash flows from those
businesses, which is used in determining whether the fair value of those
businesses are less than the carrying amount of the assets of those
businesses. It is possible that the Company may need to record additional
impairment losses as a result of testing these or other units for impairment
during the annual impairment tests or on an interim basis if a triggering event
occurs.
Stock-Based
Compensation. We recognize share-based compensation expense
based on the fair value recognition provision of SFAS No. 123(R), Share-Based Payment, using
the Black-Scholes option valuation method. Under that method,
assumptions are made with respect to the expected lives of the options or other
stock awards granted, the expected volatility of the Company’s stock, dividend
yield percentage and the risk-free interest rate at the date of
grant. In addition, under SFAS No. 123(R), we recognize and
report share-based compensation expense net of an estimated forfeiture rate that
we expect will occur over the vesting period of the stock awards, which we
estimate on the basis of historical forfeiture experience or other factors that
could affect the likelihood of forfeiture. Due to the smaller number
of stock awards granted to fewer employees since the Company adopted SFAS No.
123R, and the cumulative nature of any adjustment arising from a change in the
forfeiture rate, we monitor the forfeiture rate very closely, to ensure that all
stock awards that vest are fully expensed at the time the vesting
occurs. Once we determine the compensation expense of a stock award,
that expense is recognized in our consolidated statements of
operations over its vesting period using the straight-line attribution
method. During fiscal 2007 and 2008, we issued restricted shares to
outside members of the Board of Directors and to our CEO and, accordingly, we
recognize stock-based compensation over the vesting period of such restricted
shares, based upon the closing stock prices of the shares on their respective
dates of the grant, net of an estimated forfeiture rate.
Capitalized
Software. In fiscal years 2008, 2007 and 2006, we capitalized
approximately $1,436,000, $1,483,000 and $421,000, respectively, of software
development costs related to a number of in-house software development projects,
in accordance with Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1
requires that certain costs incurred, either from internal or external sources,
be capitalized as part of intangible assets and amortized on a straight-line
basis over the useful life of the software, which be believe is conservatively
estimated at three years. Planning, training, support and maintenance
costs incurred either prior to or following the implementation phase are
recognized as expense in the period in which they are
incurred. During the fiscal years ended June 30, 2008, 2007 and 2006,
we recorded approximately $591,000, $193,000 and $11,000, respectively, as
amortization expense related to such capitalized software
projects. We evaluate the carrying values of capitalized software to
determine if the carrying values are impaired, and, if necessary, an impairment
charge is recorded in the period in which an impairment occurs.
Income Taxes and Deferred Tax
Assets. We account for income taxes in accordance with SFAS
No. 109, Accounting for
Income Taxes and FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109
(“FIN48”). SFAS No. 109 requires the recording of
deferred tax assets and liabilities for the future consequences of events that
have been recognized in the Company’s financial statements or tax
returns. Measurement of the deferred items is based on enacted tax
laws. In the event the future consequences of differences between
financial reporting bases and tax bases of the Company’s assets or liabilities
result in a deferred tax asset, SFAS No. 109 requires that we evaluate the
probability of realizing the future benefits comprising that asset and we review
the nature, the expected timing of the realization of these assets and the
expiration dates for net operating losses or credits, when determining the
likelihood of realization. The company has gross deferred tax assets
of $5,967,000 at June 30, 2008. The deferred tax assets include tax
deductions that will arise in future years for the impairment losses recognized
at June 30, 2008. Also included in the deferred tax assets at June
30, 2008 are $2,275,000 of net operating losses which expire no later than 2027
and $908,000 of California Enterprise Zone Credits, which can be carried forward
indefinitely. Realization of such deferred tax assets is dependent on
generating sufficient taxable income in future periods. Utilization
of the net operating losses requires the Company to generate sufficient taxable
income before their expiration. The California Enterprise Zone
Credits will only be utilized if taxable income is generated in the Enterprise
Zone. Due to the length of time and the extent of the taxable income
required to fully realize the deferred tax assets related to the impairment loss
and the California Enterprise Zone Credits, the Company recorded a valuation
allowance of $4,550,000 against such assets at June 30, 2008. The
remaining net deferred tax asset of $1,395,000 has been determined by management
to be more likely than not realizable at June 30, 2008 based upon projections of
future taxable income.
FIN 48
clarifies the accounting for uncertainty in tax positions and prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return and, in addition, requires us to disclose our policy for the
classification of interest and penalties in our statements of
operations. FIN 48 requires that we adjust our financial
statements to reflect only tax positions which we believe are
more-likely-than-not to be sustained on audit, based on the technical merits of
the positions. FIN 48 requires that any necessary adjustment be
recorded directly to the beginning balance of retained earnings or accumulated
deficit in the period of adoption of FIN 48 and reported as a change in
accounting principle, if material. During the first quarter of fiscal
2008, the cumulative effects of applying FIN 48 were recorded as an
increase of $170,000 to accumulated deficit, an increase to income taxes payable
of $279,000 and a decrease in deferred tax liabilities of
$109,000. Interest and penalties totaled $101,000 as of July 1, 2007,
the date of the adoption of FIN 48, and were accounted for as part of the
total adjustment to accumulated deficit of $170,000. During fiscal
year 2008, which followed the adoption of FIN 48, we recorded approximately
$13,000 in interest and penalties as components of income tax
expense.
Results
of Operations
The
following table sets forth certain financial data, expressed as a percentage of
net revenues, derived from our Consolidated Statements of Operations for the
respective periods indicated below:
|
|
Fiscal
Years Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of revenues
|
|
|
56.6 |
% |
|
|
47.7 |
% |
|
|
40.3 |
% |
Gross
profit
|
|
|
43.4 |
% |
|
|
52.3 |
% |
|
|
59.7 |
% |
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
expenses
|
|
|
19.2 |
% |
|
|
18.5 |
% |
|
|
13.4 |
% |
General & administrative
expenses
|
|
|
36.9 |
% |
|
|
38.5 |
% |
|
|
35.4 |
% |
Impairment losses
|
|
|
26.8 |
% |
|
|
0.2 |
% |
|
|
- |
|
Amortization of intangible
assets
|
|
|
2.8 |
% |
|
|
2.3 |
% |
|
|
0.7 |
% |
Total
operating expenses
|
|
|
85.7 |
% |
|
|
59.5 |
% |
|
|
49.5 |
% |
Operating
income (loss)
|
|
|
(42.3 |
)% |
|
|
(7.2 |
)% |
|
|
10.2 |
% |
Interest
income, net
|
|
|
2.7 |
% |
|
|
5.3 |
% |
|
|
6.4 |
% |
Income
(loss) before provision for income taxes
|
|
|
(39.6 |
)% |
|
|
(1.9 |
)% |
|
|
16.6 |
% |
Provision
(benefit) for income taxes
|
|
|
(2.4 |
)% |
|
|
(0.1 |
)% |
|
|
7.4 |
% |
Income
(loss) from continuing operations
|
|
|
(37.2 |
)% |
|
|
(1.8 |
)% |
|
|
9.2 |
% |
Income
from discontinued operations, net of gain on sales of
discontinued businesses (net of
income taxes)
|
|
|
- |
|
|
|
0.5 |
% |
|
|
0.8 |
% |
Net
income (loss)
|
|
|
(37.2 |
)% |
|
|
(1.3 |
)% |
|
|
10.0 |
% |
Net Revenues. Net
revenues consist primarily of fees that we generate from the authentication and
grading of high-value collectibles, including coins, sportscards, autographs,
stamps and currency, and high-value assets consisting of diamonds and colored
gemstones. To a lesser extent, we generate collectibles related
service revenues (referred to as “other related revenues”) from sales of
collectibles club memberships and advertising on our websites and in printed
publications and collectibles price guides; subscription-based revenues
primarily related to our CCE dealer-to-dealer Internet bid-ask market for coins
authenticated and graded by us; and fees earned from promoting, managing and
operating collectibles conventions. Net revenues also include, to a
significantly lesser extent, revenues from the sales of products, consisting
primarily of coins that we purchase under our warranty
policy. Revenues from product sales are not considered an integral
part of our on-going revenue generating activities. In the year ended
June 30, 2006, such sales accounted for less than $50,000 of our net
revenues. However, product sales generated revenues of $1,061,000, or
2.5%, and $289,000, or 0.7%, of our total net revenues in fiscal 2008 and 2007,
respectively.
The
following tables set forth our total net revenues for the fiscal years ended
June 30, 2008, 2007 and 2006, broken out between grading and authentication
services and other related products and services, respectively:
|
|
|
|
|
|
|
|
2008
vs. 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease)
|
|
|
|
Amount
|
|
|
%
of Net
Revenues
|
|
|
Amount
|
|
|
%
of Net
Revenues
|
|
|
Amount
|
|
|
%
of Net
Revenues
|
|
|
|
(Dollars
in thousands)
|
|
Grading
and authentication fees
|
|
$ |
33,897 |
|
|
|
80.7 |
% |
|
$ |
34,003 |
|
|
|
84.1 |
% |
|
$ |
(106 |
) |
|
|
(0.3 |
)% |
Other
related products and services
|
|
|
8,087 |
|
|
|
19.3 |
% |
|
|
6,449 |
|
|
|
15.9 |
% |
|
|
1,638 |
|
|
|
25.4 |
% |
Total
net revenues
|
|
$ |
41,984 |
|
|
|
100.0 |
% |
|
$ |
40,452 |
|
|
|
100.0 |
% |
|
$ |
1,532 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
2007
vs. 2006
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(Decrease)
|
|
|
|
Amount
|
|
|
%
of Net
Revenues
|
|
|
Amount
|
|
|
%
of Net
Revenues
|
|
|
Amount
|
|
|
%
of Net
Revenues
|
|
|
|
(Dollars
in thousands)
|
|
Grading
and authentication fees
|
|
$ |
34,003 |
|
|
|
84.1 |
% |
|
$ |
33,221 |
|
|
|
90.0 |
% |
|
$ |
782 |
|
|
|
2.4 |
% |
Other
related services
|
|
|
6,449 |
|
|
|
15.9 |
% |
|
|
3,693 |
|
|
|
10.0 |
% |
|
|
2,756 |
|
|
|
74.6 |
% |
Total
net revenues
|
|
$ |
40,452 |
|
|
|
100.0 |
% |
|
$ |
36,914 |
|
|
|
100.0 |
% |
|
$ |
3,538 |
|
|
|
9.6 |
% |
The
following tables set forth certain information regarding the increases or
decreases in (i) net revenues from the authentication and grading of
collectible coins and sportscards, which are the two largest markets for our
services, and (ii) net revenues from our other businesses, which include
the authentication and grading of other collectibles and diamonds and colored
gemstones. The other-related services and product sales for each
business are included in the revenues of that business.
|
|
|
|
|
|
|
|
2008
vs. 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of Net
|
|
|
|
|
|
%
of Net
|
|
|
Revenues
|
|
|
Units
Processed
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amounts
|
|
|
Percent
|
|
|
Number
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Coins
|
|
$ |
22,925 |
|
|
|
54.6 |
% |
|
$ |
23,317 |
|
|
|
57.6 |
% |
|
$ |
(392 |
) |
|
|
(1.7 |
)% |
|
|
(83,800 |
) |
|
|
(5.4 |
)% |
Sportscards
|
|
|
8,982 |
|
|
|
21.4 |
% |
|
|
8,797 |
|
|
|
21.8 |
% |
|
|
185 |
|
|
|
2.1 |
% |
|
|
66,800 |
|
|
|
5.3 |
% |
Other
(1)
|
|
|
10,077 |
|
|
|
24.0 |
% |
|
|
8,338 |
|
|
|
20.6 |
% |
|
|
1,739 |
|
|
|
20.9 |
% |
|
|
47,300 |
|
|
|
15.8 |
% |
|
|
$ |
41,984 |
|
|
|
100.0 |
% |
|
$ |
40,452 |
|
|
|
100.0 |
% |
|
$ |
1,532 |
|
|
|
3.8 |
% |
|
|
30,300 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
2007
vs. 2006
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
%
of Net
|
|
|
|
|
|
%
of Net
|
|
|
Revenues
|
|
|
Units
Processed
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amounts
|
|
|
Percent
|
|
|
Number
|
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
Coins
|
|
$ |
23,317 |
|
|
|
57.6 |
% |
|
$ |
23,829 |
|
|
|
64.6 |
% |
|
$ |
(512 |
) |
|
|
(2.1 |
)% |
|
|
(227,600 |
) |
|
|
(12.7 |
)% |
Sportscards
|
|
|
8,797 |
|
|
|
21.8 |
% |
|
|
8,461 |
|
|
|
22.9 |
% |
|
|
336 |
|
|
|
4.0 |
% |
|
|
62,400 |
|
|
|
5.2 |
% |
Other
(1)
|
|
|
8,338 |
|
|
|
20.6 |
% |
|
|
4,624 |
|
|
|
12.5 |
% |
|
|
3,714 |
|
|
|
80.3 |
% |
|
|
47,000 |
|
|
|
18.6 |
% |
|
|
$ |
40,452 |
|
|
|
100.0 |
% |
|
$ |
36,914 |
|
|
|
100.0 |
% |
|
$ |
3,538 |
|
|
|
9.6 |
% |
|
|
(118,200 |
) |
|
|
(3.6 |
)% |
(1)
|
Consists
of revenues from the authentication and grading of autographs, stamps,
currency businesses and our CFC dealer financing business during all
periods presented. Also includes revenues from (i) the CCE
subscription business from September 2, 2005, (ii) the authentication
and grading of diamonds from November 2005, when we completed our
acquisition of GCAL, (iii) the collectibles convention business from
July 2006, when we completed our acquisition of Expos, and (iv) the
authentication and grading of colored gemstones from August 2006, when we
completed our acquisition of AGL.
|
Fiscal 2008 vs.
2007. Our net revenues increased by $1,532,000, or 3.8%, in
fiscal year 2008 to $41,984,000 from $40,452,000 in fiscal year
2007. That increase was due primarily to net revenue increases of
$866,000, or 14%, generated by our other-related services, and $772,000
generated by product sales, partially offset by a $106,000, or 0.3%, decrease in
grading and authentication service fees. As discussed above, product
revenues represent the sale, primarily of coins that are purchased under our
warranty policy and, as such, are not considered an integral part of our primary
revenue generating activities. Therefore, excluding product revenues,
total service revenues increased by 1.9% in fiscal 2008, compared to
2007.
The
$866,000 increase in other-related service revenues in fiscal 2008, compared
with fiscal 2007, was primarily the result of increased advertising revenues
earned on the Company’s coin and sportscards publications and increased revenues
in our CFC financing business.
The
decrease of $106,000 in grading and authentication fees in fiscal 2008, compared
to fiscal 2007, was comprised primarily of a decrease of $1,318,000 or 6% in
coin grading and authentications fees, which was substantially, but not fully,
offset by a $1,228,000, or 25%, increase in fees generated by our other grading
and authentication businesses, other than sportscard grading, the fees from
which were essentially unchanged in 2008 from 2007. The decrease in
coin grading revenues in 2008 was primarily attributable to a $1,500,000
decrease in coin trade show revenues, as a result of (i) our attending two
fewer collectibles trade shows in fiscal 2008 than in fiscal 2007, and
(ii) a decrease in grading submissions at the trade shows we attended in
the second half of 2008. We believe the high price of gold and the
adverse effect this increase had on the volume of gold coins submissions at
trade shows in the second half of the year was due to limited capital and
borrowing capacity in the market to absorb the higher price of gold coins and
dealers avoiding the relatively higher cost of submissions at trade shows as
compared with our other services. On the other hand, vintage coins
grading revenues, on which we usually generate higher revenues due primarily to
faster turn-around times requested by submitters, increased by 6% in fiscal
2008, compared with fiscal 2007; however, that increase was largely offset by a
6% decrease in modern coin grading revenues in fiscal 2008.
Fiscal 2007 vs. 2006.
Revenues increased by $3,538,000 or 9.6% to $40,452,000 in fiscal year
2007, compared to $36,914,000 in fiscal year 2006. This increase was
attributable primarily to (i) an increase of approximately $2,756,000, or
74.6%, in net revenues generated primarily by the other (non-grading) related
services, attributable primarily to businesses we acquired in the fiscal year
2006 and first three months of fiscal 2007, and (ii) an increase of
approximately $782,000, or 2.4%, in grading and authentication
revenues. The increase in grading and authentication revenues was
largely attributable to increases in the volume of submissions of sportscards,
other collectibles and diamonds and colored gemstones, which more than offset a
decline in coin authentication and grading revenues. Approximately
$2,200,000 of the increase in our fiscal 2007 revenues was generated by the
collectibles convention business and our colored gemstone grading business, AGL,
both of which we acquired in the first three months of fiscal
2007. Excluding the contribution made by those two businesses,
revenues grew by 3.6% in 2007 as compared to fiscal 2006.
The 74.6%
increase in revenues generated by our other (non-grading) related service
businesses in 2007, as compared to fiscal 2006, was primarily attributable to
(i) increased sales of Collectors Club memberships and CCE subscriptions,
(ii) an increase in interest earned as a result of an increase in the
average amount of loans outstanding to dealers under our dealer finance program,
and (iii) revenues generated by our collectibles convention business that
we acquired at the beginning of fiscal 2007.
The 2.4%
increase in grading and authentication revenues was driven by a 6.4% increase in
the average service price per unit for our grading and authentication
businesses, compared to the prior fiscal year, offset by a 3.6% decrease in
total units graded. Coin grading revenues decreased by 4.3% and the
number of units graded decreased by 12.7%, primarily driven by (i) a
$1,660,000 decrease in show and invitational revenues (ii) a net $170,000
decrease in revenue attributable to a decrease in First Strike/Bulk units
graded, partially offset by an increase in the average service fees earned on
those units; and (iii) a $880,000 increase in revenue due to an increase in
the volume of vintage collectibles submissions. We believe the
reduction in the First Strike submissions was due to a number of factors,
including a dispute related to PCGS’ trademarked First Strike designation, which
was subsequently resolved.
For
sportscards, the 5.3% increase in the number of units graded was partially
offset by a 14.9% decrease in advertising revenue, resulting in a 4.0% increase
in net revenues.
A 18.6%
increase in units graded and authenticated for other collectibles and diamonds
and colored gemstones resulted in a 35.5% increase in the grading and
authentication revenues generated by those businesses in 2007, as compared to
2006, primarily driven by increases in the volume of diamond and stamp grading
submissions, as well as the contribution to our revenues of our colored gemstone
authentication and grading business, which we acquired in August of
2006.
Gross
Profit
Gross
profit is calculated by subtracting the cost of revenues from net
revenues. Gross profit margin is gross profit stated as a percent of
net revenues. The costs of authentication and grading revenues
consist primarily of labor to authenticate and grade collectibles, production
costs, credit card fees, warranty expense, occupancy, security, depreciation,
amortization and insurance costs that directly relate to providing
authentication and grading services. Cost of revenues also includes
printing, other direct costs of the revenues generated by our other non-grading
services and the costs of product revenues, which represent the carrying value
of the inventory of products (primarily collectible coins) that we
sold. In addition, costs of revenues include stock-based compensation
attributable to employees whose compensation is classified as part of the costs
of authentication and grading revenues.
Set forth
below is information regarding our gross profits in the fiscal years ended June
30, 2008, 2007 and 2006.
|
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Gross
profit
|
|
$ |
18,211 |
|
|
$ |
21,155 |
|
|
$ |
22,024 |
|
Gross
profit
margin
|
|
|
43.4 |
% |
|
|
52.3 |
% |
|
|
59.7 |
% |
Fiscal
2008 vs. 2007. As indicated in the above table, our total
gross profit margin declined from 52.3% in fiscal 2007 to 43.4% in fiscal
2008. Excluding gross profit on revenues generated by product sales,
which are not an integral part of our core revenue generating activities, the
gross profit margin for grading and authentication and other related services in
2008 was 44.2%, compared with 52.4% for 2007.
In the
case of our coin business, that decline reflects (i) the decrease in the
number of coins graded in 2008, compared to 2007, and a change in the mix of
coin services rendered to a higher proportion of lower margin submissions which
resulted in a small reduction in the average service fee earned on coins in
fiscal 2008; (ii) the $822,000 increase in warranty costs recognized in the
second quarter of fiscal 2008 as a result of the increase in the dollar amount
of warranty claims described above; and (iii) an increase in personnel,
travel, printing, and on-going warranty costs in support of our coin grading
activities.
The
decline in gross profit margins in our diamond business were primarily
attributable to higher salaries and fixed costs due to our occupancy
of a larger facility to provide increased grading capacity.
The
decline in gross profit margins in our colored gemstone grading business, which
we acquired in August, 2006, was primarily due to the addition of personnel to
increase our grading capacity, as we focused attention on growing our colored
gemstone grading business and launching additional colored gemstone grading
services.
2007 vs. 2006. The
decline in our gross profit margin to 52.3% in the fiscal year ended June 30,
2007, from 59.7% in fiscal 2006, was attributable to a number of different
factors, including the following: (i) a decline in the gross margin on coin
authentication and grading, due primarily to an increase in costs resulting from
the addition of new coin grading capacity in anticipation of increased volumes
of submissions and to reduce the turnaround times within which coins are
authenticated and graded; (ii) a decline in the gross margin realized on
sportscard authentication and grading services, due primarily to a decrease in
sportscard related advertising revenues and higher production costs incurred due
to a change in the mix of sportscard units graded in 2007 as compared to 2006;
(iii) a change in the mix of our authentication and grading revenues to a
lower proportion of coin authentication and grading revenues, on which we have
historically realized higher margins than on the authentication and grading of
other collectibles, as coin revenues represented approximately 58% of total net
revenues in the fiscal 2007, compared to approximately 65% of total net revenues
in fiscal 2006; and (iv) the early stage of our diamond and colored
gemstone grading businesses as we increased our diamond grading capacity in
anticipation of increased revenues in future periods. The decline was
partially offset by a $108,000 decrease in the stock-based compensation costs
classified as cost of revenues in fiscal 2007, from $302,000 in fiscal
2006.
Selling
and Marketing Expenses
Selling
and marketing expenses are comprised primarily of advertising and promotions
costs, trade-show related expenses, customer service personnel costs,
depreciation and third party consulting costs.
|
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Selling
and marketing expenses
|
|
$ |
8,073 |
|
|
$ |
7,497 |
|
|
$ |
4,918 |
|
As
a percentage of net revenues
|
|
|
19.2 |
% |
|
|
18.5 |
% |
|
|
13.4 |
% |
Fiscal 2008 vs. 2007. The $576,000 increase
in selling and marketing expenses in fiscal 2008 compared with fiscal 2007 was
primarily attributable to (i) an increase of $390,000 in such expenses
related to business development activities primarily by our collectibles grading
and subscription divisions, which included increased participation at trade
shows by other non-coin grading divisions; and (ii) an increase of $165,000
in sales and marketing expense to foster brand awareness and to attract
increased submissions for our diamond and colored gemstone
businesses. Increases in sales and marketing expenses for our diamond
and colored gemstone businesses were incurred in the first and second quarters
of our fiscal year which coincide with the traditional holiday buying season in
those markets. In the second half of our fiscal year, sales and
marketing costs for our diamond and colored gemstone businesses decreased by
approximately $600,000 compared to the same six-month period of the prior year,
as we transition from our branding and awareness marketing campaigns to a more
units driven marketing approach.
2007 vs. 2006. The
increases in selling and marketing expenses of $2,579,000 in absolute dollars
and 5.1% as a percentage of net revenues, in fiscal 2007, compared to the prior
fiscal year, were primarily attributable to (i) an increase of
approximately $1,863,000 in sales and marketing costs to market and promote our
new businesses, including our diamond grading business (which we acquired in
November 2005), our colored gemstone grading business (which we acquired in
August 2006), and our CCE subscription business (which we acquired in September
2005); (ii) a $339,000 increase in sales and marketing costs primarily to
promote our coin and sportscard authentication and grading services at trade
shows (including an increase in the number of trade shows attended) and in other
channels; and (iii) increases in general marketing costs, including an
increase in marketing-related compensation costs attributable to the hiring, in
November 2006, of a chief marketing officer for our diamond and colored
gemstone businesses.
General and Administrative
Expenses
General
and administrative (“G&A”) expenses are comprised primarily of compensation
paid to general and administrative personnel, including executive management,
finance and accounting, information technology personnel, facilities management
costs depreciation, amortization and other miscellaneous
expenses. G&A expenses also include stock-based compensation
costs arising from the grant of stock awards to general and administrative
personnel, in accordance with SFAS No. 123(R).
|
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
General
& administrative expenses
|
|
$ |
15,480 |
|
|
$ |
15,585 |
|
|
$ |
13,068 |
|
As
a percentage of net revenues
|
|
|
36.9 |
% |
|
|
38.5 |
% |
|
|
35.4 |
% |
Fiscal 2008 vs.
2007. G&A expenses at $15,480,000 in fiscal 2008 were
essentially unchanged from the $15,585,000 in 2007. In fiscal 2008 we
incurred higher costs in our colored gemstone business of approximately $320,000
reflecting our ownership of that business for the entire year in 2008 compared
with ten and a half months in fiscal 2007, and increased infrastructure costs
incurred to support the growth of that business. In addition, we
incurred a $205,000 increase in G&A related stock-based compensation costs
in 2008, as compared to 2007, due primarily to restricted stock awards granted
to our CEO and our outside (non-management) directors in 2007 and
2008. We also invested in additional accounting and information
technology personnel of approximately $150,000 to support the Company’s expanded
businesses. These increased costs were offset by savings in legal,
professional and outside services costs compared to fiscal 2007.
2007 vs. 2006. The
increase in G&A expenses of $2,517,000 in fiscal 2007, compared to prior
fiscal year, was primarily attributable to (i) expenses, totaling
approximately $1,723,000, incurred in connection with initiatives to grow our
then recently acquired diamond, colored gemstone, and trade show businesses;
(ii) increased costs of approximately $560,000, to upgrade and expand our
internal systems to support an increased volume of business and our entry into
new markets; and (iii) increased business development costs of
approximately
$300,000, incurred in connection with our coin authentication and grading
business. Such cost increases were partially offset by a reduction in
litigation-related costs in fiscal 2007, compared to the same periods of fiscal
2006, during which we incurred legal fees and expenses in connection with the
Miller
trial. Stock-based compensation costs (including $164,000 of
amortization expense related to restricted stock awards) included in general and
administrative expenses for fiscal 2007 were $688,000, compared with $367,000
for fiscal 2006.
Impairment Losses
|
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Impairment
losses
|
|
$ |
11,233 |
|
|
$ |
55 |
|
|
$ |
- |
|
As
a percentage of net revenues
|
|
|
26.8 |
% |
|
|
0.2 |
% |
|
|
0.0 |
% |
The increase in impairment losses in
fiscal 2008 as compared to fiscal 2007 is due to the impairment of goodwill,
intangible assets, equipment and other assets in our diamond and colored
gemstone grading businesses. During fiscal 2008, approximately
$9,064,000, $1,860,000, $176,000 and $133,000 were recorded as impairment losses
for goodwill, other intangible assets, equipment and other assets,
respectively. In fiscal year 2007, we recorded impairment losses of
$25,000 for equipment and $16,000 for intangible assets in relation to our
jewelry businesses and $14,000 unrelated to our jewelry businesses. The fiscal
2008 impairments were the result of past losses and the uncertainty of the
timing and magnitude of future revenues and related cash flows that are used in
the determination of fair value. Under circumstances in which the fair values of
long-lived assets and goodwill are not recoverable on the basis of future cash
flows, we record impairment losses such that the carrying values of these assets
reflect their current estimate of fair values.
Amortization
of Intangible Assets
|
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Amortization
expense
|
|
$ |
1,193 |
|
|
$ |
950 |
|
|
$ |
269 |
|
As
a percentage of net revenues
|
|
|
2.8 |
% |
|
|
2.3 |
% |
|
|
0.7 |
% |
The
increase in the amortization expense of $243,000 in fiscal 2008, compared to
fiscal 2007, related to the amortization of capitalized software costs for which
amortization commences as development projects are completed. In
addition, we also incur amortization costs in connection with the intangible
assets acquired in business acquisitions that occurred during fiscal 2006
through the first quarter of fiscal 2007. Capitalized software costs and
acquired intangible assets are being amortized over their estimated useful lives
as described in note 2 to our Consolidated Financial Statements included in Item
8 of this Report.
Stock-Based
Compensation
We
recognized stock-based compensation (which includes compensations costs related
to the issuance of restricted stock and stock option grants) of $1,225,000,
$890,000 and $670,000 during fiscal 2008, 2007 and 2006,
respectively. Stock-based compensation is recorded as part of
(i) costs of sales, in the case of stock awards granted to employees whose
costs are classified as cost of revenues, (ii) selling and marketing
expenses in the case of stock awards granted to marketing and sales personnel
and (iii) general and administrative expenses in the case of stock awards
granted to directors, executive and financial management and administrative
personnel, as follows:
|
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cost
of
revenues
|
|
$ |
339 |
|
|
$ |
194 |
|
|
$ |
302 |
|
Selling
and marketing expenses
|
|
|
(7 |
) |
|
|
8 |
|
|
|
1 |
|
General
and administrative expenses
|
|
|
893 |
|
|
|
688 |
|
|
|
367 |
|
|
|
$ |
1,225 |
|
|
$ |
890 |
|
|
$ |
670 |
|
We issue
stock options or restricted stock awards to employees and outside directors with
respect to which the only condition for vesting is continued employment or
service during the related vesting period. Typically, the vesting
period is four years for employee awards and shorter periods for director
awards, reflecting their service periods, although we have, on occasion, granted
stock options with immediate vesting.
During
fiscal 2008 and fiscal 2007, we issued a total of approximately 78,000 shares of
restricted stock to our CEO, CFO (“management”) and the non-management
directors, which required us to recognize stock-based compensation expense of
approximately $352,000 and $164,000 during fiscal 2008 and 2007,
respectively. No shares of restricted stock were issued in fiscal
2006 and no stock-based compensation related to restricted shares was recognized
in 2006. The shares of restricted stock issued to management and our
outside directors have vesting periods of four years and one year,
respectively. Compensation cost is determined based on the closing
price per share of our common stock, as reported by NASDAQ, as of the date of
the grant and is recognized as stock-based compensation expense over the vesting
period on a straight-line basis, net of an estimated forfeiture rate of 7% in
2007 and 5% in 2008.
Options
to purchase a total of 30,200, 65,000 and 42,000 shares of our common stock were
granted to employees during fiscal 2008, 2007 and 2006,
respectively. We calculate stock-based compensation by estimating the
fair value of stock options as of their respective grant dates using the
Black-Scholes option valuation model and various assumptions that are described
in Note 2 to our Consolidated Financial Statements included in Item 8 of this
Report and recognize such costs on a straight-line basis over the vesting period
of the options.
For
fiscal years 2008, 2007 and 2006, stock-based compensation consisted of
compensation costs attributable to options granted in prior years that were
outstanding but were not fully vested as of July 1, 2005, the adoption date of
SFAS No. 123(R), and compensation costs for options that were granted following
July 1, 2005 to June 30, 2008, prorated from their respective grant dates to
June 30, 2008. Compensation costs, as determined, were adjusted for
estimated forfeitures in accordance with SFAS No. 123(R).
The
forfeiture rate for stock options was 5%, 9% and 10.5% for fiscal years 2008,
2007 and 2006, respectively.
A total
of $1,056,000 of compensation expense related to unvested stock-based
compensation awards remained unrecognized as of June 30, 2008 and will be
recognized as compensation expense as follows:
Year
Ending June 30,
|
|
Amount
|
|
2009
|
|
$ |
645,000 |
|
2010
|
|
|
271,000 |
|
2011
|
|
|
124,000 |
|
2012
|
|
|
16,000 |
|
Total
|
|
$ |
1,056,000 |
|
These
amounts, which are non-cash expenses, do not include the cost of any additional
stock-based compensation awards that may be granted in future periods nor, as
mentioned above, any changes that might occur in the Company’s forfeiture
percentage.
Interest
Income, Net
Interest
income is generated on cash balances that we have invested, primarily in highly
liquid money market accounts and funds, short-term bank certificates of deposit
and commercial paper instruments and tax-free funds. Such interest
income does not include the interest that we generate on loans we make pursuant
to our dealer-finance program, which are included in net revenues.
|
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Interest
income,
net
|
|
$ |
1,117 |
|
|
$ |
2,144 |
|
|
$ |
2,346 |
|
Percent
of net
revenue
|
|
|
2.7 |
% |
|
|
5.3 |
% |
|
|
6.4 |
% |
Fiscal 2008 vs.
2007. Interest income, net was $1,117,000 in 2008, compared
with $2,144,000, in 2007. The decrease in interest income was
primarily attributable to (i) a shift of our cash and cash equivalent
balances for part of the year into liquid tax-free money funds from taxable
investments; (ii) a decrease in our average cash balances in 2008, compared
to 2007, due to our use of cash to fund increased payments of
quarterly dividends, capital expenditures, the repurchases of shares of our
common stock under our share buyback program, increases in advances under our
dealer financing program and cash used to fund operating losses; and
(iii) a decrease in interest rates earned on our cash and cash equivalent
balances during 2008, compared with 2007, due to reductions in prevailing market
rates of interest as a result of actions taken by the Federal Reserve
Board.
2007 vs. 2006. The
reduction in interest income, net to $2,144,000 in fiscal 2007, from $2,346,000
in fiscal 2006, was primarily due to decreases in our average cash, cash
equivalents and short-term investment balances during fiscal 2007, reflecting
our use of cash to fund (i) business acquisitions in fiscal year 2007;
(ii) capital expenditures, primarily for purchase of fixed assets;
(iii) the payment of quarterly cash dividends to our stockholders; and
(iv) repurchases of our common stock under our stock buyback program, which
more than offset cash generated from operations and the effect on interest
income of increases in prevailing interest rates in fiscal year 2007, as
compared to fiscal 2006.
Provision
(Benefit) for Income Taxes
|
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Provision
(benefit) for income
taxes
|
|
$ |
(1,016 |
) |
|
$ |
(39 |
) |
|
$ |
2,733 |
|
Percent
of net
revenue
|
|
|
(2.4 |
)% |
|
|
(0.1 |
)% |
|
|
7.4 |
% |
The
income tax benefit recorded in fiscal 2008 reflects an effective tax benefit
rate of 6.1% due to a pre-tax loss in fiscal 2008 and permanent differences
between the Company’s income for book purposes and for tax purposes, reflecting
the non-deductibility of stock-based compensation costs related to incentive
stock options and the recognition of a valuation allowance in fiscal 2008 for
deferred tax assets on the basis that it would be more likely than not that
these assets would not be recoverable by estimates of future taxable income. Due
to the length of time and the extent of the taxable income required to fully
realize the deferred tax assets related to the impairment loss and the
California Enterprise Zone Credits, the Company recorded a valuation allowance
against such assets at June 30, 2008 in the amount of approximately $4,550,000.
For fiscal 2007, the effective tax benefit was approximately 5% and reflected
the higher percentage of permanent differences between income for book and
income for tax purposes due to the level of losses in 2007. For
fiscal 2006, our effective tax rate was 45% reflecting such permanent
differences, which had the effect of increasing the effective tax rate in 2006,
as the Company earned income in that year.
Discontinued
Operations
|
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Income
(loss) from discontinued operations, net of gains on
sales of discontinued businesses (net of income taxes)
|
|
$ |
(2 |
) |
|
$ |
228 |
|
|
$ |
296 |
|
The
income (loss) from discontinued operations relates to the disposal of the
collectible sales businesses and includes (i) the losses or gains
recognized on the sales of those businesses and the disposition of the assets of
those businesses that we retained (consisting primarily of inventories and
accounts receivables); (ii) for fiscal 2006 the results of CTP from
September 2, 2005 to November 30, 2005 (the date of its disposition); and
(iii) the gain on disposal of the discontinued businesses related to
additional consideration on the sales of those businesses that became
determinable in fiscal 2006 and 2007 (as the terms of the sales of some of those
businesses provided for the payment to us of future consideration based on the
performance of those businesses for periods subsequent to their
sales).
Quarterly
Results of Operations and Seasonality
The
following tables present unaudited quarterly financial information for each of
the eight quarters beginning September 30, 2006 and ending on June 30,
2008. The information has been derived from our unaudited quarterly
financial statements, which have been prepared by us on a basis consistent with
our audited Consolidated Financial Statements appearing elsewhere in this Form
10-K. The consolidated financial information set forth below includes
all adjustments (consisting of normal adjustments and accruals) that management
considers necessary for a fair presentation of the unaudited quarterly results
when read in conjunction with the consolidated financial statements and the
notes thereto appearing elsewhere in this Form 10-K. These quarterly
operating results, which reflect the reclassification of our results of
operations between continuing operations and discontinued operations as a result
of the disposition of our collectibles sales businesses, are not necessarily
indicative of results that may be expected for any subsequent
periods.
Generally,
the revenues generated by our collectibles grading and authentication businesses
are lower during our second quarter, which ends on December 31, than in other
quarterly periods. On the other hand, our diamond and colored
gemstone grading businesses (which we acquired in November 2005 and August 2006,
respectively), generate higher revenues in our second quarter, which coincides
with the winter holiday season, than in other quarterly periods. Our
expectation is that, over time, our diamond and colored gemstone revenues will
represent a higher proportion of total revenues and will reduce the effect of
seasonality in the second fiscal quarter.
Our
collectibles convention business, which we acquired in July 2006, adds to the
variability in our quarter-to quarter operating results, as its revenues vary
based on the timing of the collectibles conventions it
holds. Revenues for this business unit are significantly higher in
the first, third and fourth quarters of the fiscal year, compared to the second
quarter, because the Long Beach show (the larger of the two shows) takes place
during the first, third and fourth quarters, while the Santa Clara convention
takes place in the second and fourth quarters.
The following table sets forth the
unaudited consolidated financials results for quarterly periods in fiscal years
2007 and 2008. The operating loss of $12,906,000 in the fourth quarter of fiscal
2008 includes an aggregate impairment loss of $11,232,000 related to our jewelry
businesses (See notes 2, 3 and 7 to our Consolidatd Financial Statements in Item
8 of this Annual Report) consisting of goodwill impairment loss of approximately
$9,064,000 and impairment loss of other intangible assets and other assets of
approximately $2,168,000.
In addition, in the fourth quarter of
fiscal 2008, the Company recorded a valuation allowance of $4,550,000 against
deferred tax assets at June 30, 2008, such that the Company had an income tax
expense of $348,000 in the fourth quarter of fiscal 2008, despite having pre-tax
losses of $12,767,000.
Quarterly
Reports of Operations
|
|
Quarters
Ended
(In
thousands, except per share data)
|
|
|
|
Sept.
30,
2006
|
|
|
Dec.
31,
2006
|
|
|
Mar.
31,
2007
|
|
|
June
30,
2007
|
|
|
Sept.
30,
2007
|
|
|
Dec.
31,
2007
|
|
|
Mar.
31,
2008
|
|
|
June
30,
2008
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$ |
9,898 |
|
|
$ |
8,793 |
|
|
$ |
11,081 |
|
|
$ |
10,680 |
|
|
$ |
10,825 |
|
|
$ |
9,964 |
|
|
$ |
10,896 |
|
|
$ |
10,299 |
|
Cost
of revenues
|
|
|
4,356 |
|
|
|
4,367 |
|
|
|
5,138 |
|
|
|
5,436 |
|
|
|
5,200 |
|
|
|
6,797 |
|
|
|
5,997 |
|
|
|
5,779 |
|
Gross
profit
|
|
|
5,542 |
|
|
|
4,426 |
|
|
|
5,943 |
|
|
|
5,244 |
|
|
|
5,625 |
|
|
|
3,167 |
|
|
|
4,899 |
|
|
|
4,520 |
|
SG&A
expenses
|
|
|
5,241 |
|
|
|
5,089 |
|
|
|
6,126 |
|
|
|
6,626 |
|
|
|
5,965 |
|
|
|
5,590 |
|
|
|
6,124 |
|
|
|
5,874 |
|
Impairment
losses
|
|
|
- |
|
|
|
25 |
|
|
|
14 |
|
|
|
16 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
11,232 |
|
Amortization
of intangible assets
|
|
|
171 |
|
|
|
187 |
|
|
|
219 |
|
|
|
373 |
|
|
|
270 |
|
|
|
286 |
|
|
|
317 |
|
|
|
320 |
|
Operating
income (loss)
|
|
|
130 |
|
|
|
(875 |
) |
|
|
(416 |
) |
|
|
(1,771 |
) |
|
|
(611 |
) |
|
|
(2,709 |
) |
|
|
(1,542 |
) |
|
|
(12,906 |
) |
Interest
and other income, net
|
|
|
571 |
|
|
|
548 |
|
|
|
513 |
|
|
|
518 |
|
|
|
445 |
|
|
|
298 |
|
|
|
240 |
|
|
|
139 |
|
Income
(loss) before income taxes
|
|
|
701 |
|
|
|
(327 |
) |
|
|
97 |
|
|
|
(1,253 |
) |
|
|
(166 |
) |
|
|
(2,411 |
) |
|
|
(1,302 |
) |
|
|
(12,767 |
) |
Provision
(benefit) for income taxes
|
|
|
318 |
|
|
|
(147 |
) |
|
|
165 |
|
|
|
(375 |
) |
|
|
(66 |
) |
|
|
(962 |
) |
|
|
(336 |
) |
|
|
348 |
|
Income
(loss) from continuing operations
|
|
|
383 |
|
|
|
(180 |
) |
|
|
(68 |
) |
|
|
(878 |
) |
|
|
(100 |
) |
|
|
(1,449 |
) |
|
|
(966 |
) |
|
|
(13,115 |
) |
Income
(loss) from discontinued
operations, net of gain on sales of
discontinuedbusinesses
(net of income taxes)
|
|
|
11 |
|
|
|
80 |
|
|
|
99 |
|
|
|
38 |
|
|
|
(10 |
) |
|
|
6 |
|
|
|
- |
|
|
|
2 |
|
Net income
(loss)
|
|
$ |
394 |
|
|
$ |
(100 |
) |
|
$ |
31 |
|
|
$ |
(840 |
) |
|
$ |
(110 |
) |
|
$ |
(1,443 |
) |
|
$ |
(966 |
) |
|
$ |
(13,113 |
) |
Net
income (loss) per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing
operations
|
|
$ |
0.05 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.11 |
) |
|
$ |
(1.57 |
) |
From
discontinued operations, net
of gain on sales of discontinued
businesses (net
of income taxes)
|
|
|
- |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net income
(loss)
|
|
$ |
0.05 |
|
|
$ |
(0.01 |
) |
|
$ |
0.00 |
|
|
$ |
(0.10 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.11 |
) |
|
$ |
(1.57 |
) |
Net
income (loss) per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing
operations
|
|
$ |
0.04 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.11 |
) |
|
$ |
(1.57 |
) |
From
discontinued operations, net
of
gain on sales of
discontinued
businesses (net
of income taxes)
|
|
|
- |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
income (loss)
|
|
$ |
0.04 |
|
|
$ |
(0.01 |
) |
|
$ |
0.00 |
|
|
$ |
(0.10 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.11 |
) |
|
$ |
(1.57 |
) |
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,351 |
|
|
|
8,309 |
|
|
|
8,381 |
|
|
|
8,433 |
|
|
|
8,463 |
|
|
|
8,491 |
|
|
|
8,470 |
|
|
|
8,373 |
|
Diluted
|
|
|
8,628 |
|
|
|
8,309 |
|
|
|
8,587 |
|
|
|
8,433 |
|
|
|
8,463 |
|
|
|
8,491 |
|
|
|
8,470 |
|
|
|
8,373 |
|
|
|
Quarters
Ended
(In
thousands)
|
|
|
|
Sept.
30,
2006
|
|
|
Dec.
31,
2006
|
|
|
Mar.
31,
2007
|
|
|
June
30,
2007
|
|
|
Sept.
30,
2007
|
|
|
Dec.
31,
2007
|
|
|
Mar.
31,
2008
|
|
|
June
30,
2008
|
|
Selected
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
authenticated or graded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coins
|
|
|
482 |
|
|
|
281 |
|
|
|
400 |
|
|
|
396 |
|
|
|
367 |
|
|
|
293 |
|
|
|
484 |
|
|
|
331 |
|
Sportscards
|
|
|
321 |
|
|
|
296 |
|
|
|
322 |
|
|
|
324 |
|
|
|
338 |
|
|
|
313 |
|
|
|
327 |
|
|
|
351 |
|
Autographs
|
|
|
34 |
|
|
|
44 |
|
|
|
40 |
|
|
|
52 |
|
|
|
45 |
|
|
|
50 |
|
|
|
49 |
|
|
|
56 |
|
Stamps
|
|
|
12 |
|
|
|
18 |
|
|
|
17 |
|
|
|
19 |
|
|
|
20 |
|
|
|
11 |
|
|
|
13 |
|
|
|
9 |
|
Currency
|
|
|
9 |
|
|
|
7 |
|
|
|
9 |
|
|
|
11 |
|
|
|
11 |
|
|
|
11 |
|
|
|
14 |
|
|
|
23 |
|
Diamonds
|
|
|
6 |
|
|
|
9 |
|
|
|
5 |
|
|
|
5 |
|
|
|
8 |
|
|
|
12 |
|
|
|
5 |
|
|
|
5 |
|
Colored
gemstones
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
Total
|
|
|
864 |
|
|
|
655 |
|
|
|
794 |
|
|
|
808 |
|
|
|
790 |
|
|
|
691 |
|
|
|
893 |
|
|
|
777 |
|
Liquidity
and Capital Resources
At June
30, 2008, we had cash and cash equivalents of $23,345,000, as compared to
$42,386,000 at June 30, 2007, as we used cash in fiscal 2008 to fund
(i) operating losses; (ii) advances under our financing program;
(iii) capital expenditures; (iv) the payment of quarterly cash
dividends to our stockholders; and (v) repurchases of shares of our common
stock under our stock buyback program.
Historically,
we have relied on internally-generated funds, rather than borrowings, as our
primary source of funds to support our operations. Although we used
cash to fund operations in fiscal 2008, due to operating losses incurred, we
continue to expect our authentication and grading services and our subscription
services to provide us with positive operating cash flows, as our early stage
businesses grow and reduce their operating losses.
During
fiscal 2008, operating activities of our continuing operations used net cash of
$2,277,000, compared with $3,523,000 generated in fiscal 2007 due primarily to
operating losses incurred in fiscal 2008.
Investing
activities used net cash of $6,288,000 during fiscal 2008, comprised of
(i) $1,961,000 and $1,436,000, to purchase fixed assets and invest in
capitalized software, respectively, and (ii) $3,106,000 in net advances
under our financing program.
In fiscal
2008, financing activities used net cash of $10,484,000, including $8,517,000 to
pay cash dividends to stockholders and $2,209,000 to repurchase shares of our
common stock under our stock buyback program, partially offset by proceeds of
$242,000 from the exercise of employee stock options.
Bank Line of
Credit. As previously reported, in fiscal 2005, we organized
Collectors Finance Corporation (“CFC”), as a wholly-owned subsidiary, to engage
in the business of making loans primarily to coin or sportscards
dealers. All such loans were required to be collateralized by the
delivery to us of collectibles with a fair market value at least equal to the
amount of the loans. The loans were required to be repaid to us when
those collectibles are returned to the dealers. To provide a source
of funding for those loans, in June 2005, CFC obtained a revolving bank line of
credit for the original term of two years pursuant to a loan and security
agreement that permitted CFC to borrow, at any one time, up to the lesser of
(i) $7,000,000 or (ii) an amount equal to 85% of the aggregate
principal amount of those of its loan receivables that met the bank’s
eligibility criteria. Borrowings under that credit line, the term of
which was extended to July 31, 2008, were to bear interest at rates based on the
bank’s prime rate or LIBOR, as applicable, and were secured by the loans
receivable due CFC. There were no borrowings outstanding under that
line of credit during the fiscal years ended or at June 30, 2008 or
2007.
This line
of credit expired in July 2008, coinciding with a decision by the Company to
cease making new loans under our financing program. In August 2008,
the Company sold approximately $3,300,000 principal amount of its dealer loans,
which were secured by collectible coins, to an unaffiliated purchaser for a
purchase price of approximately $3,330,000 in cash.
Outstanding Financial
Obligations. We had the following outstanding obligations
under operating leases, net of sublease income at June 30, 2008, for years
ending June 30:
2009
|
|
$ |
2,209,000 |
|
2010
|
|
|
1,410,000 |
|
2011
|
|
|
990,000 |
|
2012
|
|
|
1,019,000 |
|
2013
|
|
|
1,014,000 |
|
Thereafter
|
|
|
4,086,000 |
|
|
|
$ |
10,728,000 |
|
With the
exception of these obligations, we do not have any material financial
obligations, such as long-term debt, capital lease, or long-term purchase
obligations.
Stock Buyback
Program. In December 2005, our Board of Directors approved a
stock buyback program that authorizes up to $10,000,000 of stock repurchases in
open market or privately negotiated transactions, in accordance with applicable
Securities Exchange Commission rules, when opportunities to make such
repurchases, at attractive prices, become available. We are under no
obligation to repurchase any shares under the stock buyback program and the
timing, actual number and dollar value of shares that may be repurchased under
that program will depend on a number of factors, including our future financial
performance, available cash resources and competing uses for the cash that may
arise in the future, prevailing market prices of the Company's common stock and
the number of shares that become available for sale at prices that the Company
believes are attractive. During the fiscal years ended June 30, 2008,
2007 and 2006, we repurchased a total of 232,152, 72,517 and 181,851 shares,
respectively, of our common stock under this program for aggregate purchase
prices of approximately $2,198,000, $945,000 and $2,618,000, respectively
(excluding transaction costs). Additional information regarding these
share repurchases is set forth in Item 5 of this Report. At June 30,
2008, the total dollar value of shares that could be purchased in the future
under this program was $4,239,000.
Dividends. In the
fourth quarter of fiscal 2006, the Board of Directors adopted a dividend policy
that called for the payment of quarterly cash dividends of $0.08 per common
share, for an expected annual cash dividend of $0.32 per common
share. The quarterly cash dividend was increased to $0.12 per share,
in the third quarter of fiscal 2007. In June 2007, the Board of
Directors approved another increase in the quarterly cash dividend to $0.25 per
common share for an expected annual cash dividend to stockholders of $1.00 per
common share, and dividends were paid under this policy throughout fiscal 2008
for a total dividend paid in fiscal 2008 of $8,517,000.
As we
disclosed previously, the continued payment of cash dividends was subject to a
number of factors, including the Company’s financial performance and changes in
market and financial conditions; therefore, there could be no assurance that the
amount of the cash dividend would not be reduced or the payment of cash
dividends would not be suspended or discontinued by the Board of
Directors. On September 26, 2008, the Board of Directors determined
that, due to market and economic conditions, including the liquidity crisis in
the United States, the prudent course of action would be, and the Board of
Directors voted, to suspend the future payment of cash dividends in order to
preserve the Company's cash resources to support the continued implementation of
the Company's strategic plan and the growth of its business. At the
same time, the Board of Directors approved a 10% stock dividend on the
Company's outstanding shares, and it declared this stock dividend will
be distributed on November 3, 2008 to all stockholders of record on October
20, 2008.
Uses and Sources of Cash. We plan
to use our cash resources, including the cash we generated in August 2008 from
the sale of customer loans, to (i) introduce new services for our
customers, (ii) acquire or start-up other high-value collectibles or
high-value asset authentication and grading businesses, (iii) make private
and open market share repurchases under our stock buyback program if there are
opportunities to do so at prices that we believe are attractive, and (iv)
fund working capital requirements, and for other corporate
purposes. Although we have no current plans to do so, we also may
seek borrowings, and we may issue additional shares of our stock, to finance
acquisitions of additional authentication and grading
businesses. However, there is no assurance that we will be able to
obtain such additional financing on terms acceptable to us, if at
all.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations
(Revised). This standard will replace SFAS No. 141, Business Combinations, but
will retain the fundamental requirements in Statement 141 that the acquisition
method (which Statement 141 called the purchase method) be used for
all business combinations and for an acquirer to be identified for each business
combination. Changes being made by Statement 141(R) to
previously issued authoritative guidance include requiring that: (i) assets
and liabilities arising from contingencies be recognized at fair value as of the
date of the acquisition as opposed to future periods when, or if, any or all of
the contingencies may be resolved, (ii) certain pre-acquisition related
costs (such as those that were previously accounted for as part of the
acquisition) be accounted for outside of the acquisition, and
(iii) tangible and intangible assets acquired at the time of the
acquisition related to in-process research and development be accounted for as
an asset and carried at fair value at the time of the acquisition and subject to
impairment testing. SFAS No. 141(R) will apply to all business
combinations for which the acquisition date occurs after the beginning of the
first reporting period following December 15, 2008. Earlier adoption
is prohibited. Statement 141(R) has no impact on recent
acquisitions completed by the Company.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB
No. 51. This Statement amends ARB No. 51 to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary, usually referred to as minority interests and for
the deconsolidation of such subsidiaries. This statement also
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. This statement is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Earlier adoption is
prohibited. Statement 160 has no impact on the Company, as all of our
subsidiaries are wholly-owned by us.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an Amendment of FASB Statement No. 133.
SFAS No. 161 expands the current disclosure requirements of SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities, such that entities must now provide
enhanced disclosures on a quarterly basis regarding how and why the entity uses
derivatives; how derivatives and related hedged items are accounted for under
SFAS No. 133 and how derivatives and related hedged items affect the entity’s
financial position, performance and cash flow. Pursuant to the
transition provisions of the Statement, the Company will adopt SFAS No. 161 in
fiscal year 2009. This Statement is not expected to have an impact on
the Company’s results of operations or financial condition.
On
November 5, 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 109 that supersedes SAB No. 105, Application of Accounting Principles
to Loan Commitments. SAB No. 105 stated that, in the view
of the SEC Staff, when measuring the fair value of a derivative loan commitment,
it would be inappropriate to incorporate the expected net future cash flows
related to the associated servicing of the loan. This SAB supersedes
SAB No. 105 and expresses the current view of the SEC Staff that,
consistent with the guidance in SFAS No. 156, Accounting for Servicing of
Financial Assets, and SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, the expected net future cash flows
related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value
through earnings. SAB No. 109 has no impact on the Company’s results
of operations or financial condition.
On
December 21, 2007, the SEC issued SAB No. 110 in which the SEC updated its
position in SAB 107 concerning the use of a “simplified” method to
calculate the expected term used in the determination of the fair value of a
stock option using the Black-Scholes-Merton closed-form model. Under
SAB No. 107, the SEC had limited the use of the “simplified” approach until
December 31, 2007 under the assumption that registrants would be able to develop
adequate factual histories instead of relying upon a simplified approach. Under
SAB No. 110, use of the simplified approach is permitted beyond December
31, 2007 under certain circumstances. SAB No. 110 has no impact
on our determination of the expected term assumption used in the
Black-Scholes-Merton model, as the Company has not previously utilized the
simplified method.
In April
2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. FSP 142-3 must be applied prospectively to all
intangible assets acquired as of and subsequent to fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. The Company is currently evaluating the impact that FSP
142-3 will have on its financial statements. FSP 142-3 has no
impact on recent acquisitions completed by the Company.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with generally accepted accounting principles. The adoption of SFAS
162 is not expected to have a material impact on the Company’s financial
statements.
Market
risk represents the risk of loss that may impact our financial position, results
of operations or cash flows due to adverse changes in financial market prices,
including interest rate risk, foreign currency exchange rate risk, commodity
price risk and other relevant market rate or price risks.
Due to
the cash and cash equivalent balances that we maintain, we are exposed to risk
of changes in short-term interest rates. At June 30, 2008, we had
$23,345,000 in cash and cash equivalents, primarily invested in money market
funds. Reductions in short-term interest rates could result in
reductions in the amount of that income. However, the impact on our
operating results of such changes is not expected to be material.
The
Company has no activities that would expose it to foreign currency exchange rate
risk or commodity price risks.
Index to Consolidated
Financial Statements
|
Page
|
Report
of Independent Registered Public Accounting
Firm
|
65
|
|
|
Consolidated
Balance Sheets at June 30, 2008 and
2007
|
66
|
|
|
Consolidated
Statements of Operations for the Years Ended June 30, 2008, 2007 and
2006
|
67
|
|
|
Consolidated
Statements of Stockholders’ Equity For the Years Ended June 30, 2008, 2007
and 2006
|
68
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2008, 2007 and
2006
|
69
|
|
|
Notes
to Consolidated Financial Statements For the Years Ended June 30, 2008,
2007 and 2006
|
71
|
|
|
Schedule
II – Valuation and Qualifying
Accounts
|
101
|
Board of
Directors and Stockholders
Collectors
Universe, Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of Collectors Universe,
Inc. and subsidiaries (the Company) as of June 30, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for each of the three years ended June 30, 2008. Our audits of
the basic financial statements included the financial statement schedule listed
in the index appearing under Item 15(a)(2). These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our
audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of Collectors Universe,
Inc. and subsidiaries as of June 30, 2008 and 2007 and the results of their
operations and their cash flows for each of the three years ended June 30, 2008
in conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Collectors Universe, Inc. and subsidiaries’
internal control over financial reporting as of June 30, 2008, based on criteria
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
September 29, 2008, expressed an unqualified opinion.
/s/ GRANT
THORNTON LLP
Irvine,
California
September
29, 2008
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
(in
thousands, except per share data)
|
|
June
30,
|
|
ASSETS
|
|
2008
|
|
|
2007
|
|
Current
assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
23,345 |
|
|
$ |
42,386 |
|
Accounts receivable, net of
allowance of $79 in 2008 and $60 in 2007
|
|
|
1,414 |
|
|
|
1,276 |
|
Refundable income
taxes
|
|
|
575 |
|
|
|
1,220 |
|
Inventories, net
|
|
|
983 |
|
|
|
442 |
|
Prepaid expenses and other current
assets
|
|
|
1,029 |
|
|
|
1,060 |
|
Customer notes receivable, net of
allowance of $31 in 2008 and $23 in 2007
|
|
|
2,062 |
|
|
|
2,536 |
|
Net deferred income tax
asset
|
|
|
486 |
|
|
|
1,020 |
|
Customer notes receivables held
for sale
|
|
|
3,579 |
|
|
|
- |
|
Receivables from sale of net
assets of discontinued operations
|
|
|
92 |
|
|
|
92 |
|
Total current
assets
|
|
|
33,565 |
|
|
|
50,032 |
|
|
|
|
|
|
|
|
|
|
Property and equipment,
net
|
|
|
4,482 |
|
|
|
4,081 |
|
Goodwill
|
|
|
3,974 |
|
|
|
12,884 |
|
Intangible assets,
net
|
|
|
8,494 |
|
|
|
10,365 |
|
Net deferred income tax
asset
|
|
|
909 |
|
|
|
- |
|
Note receivable from sale of
discontinued operation
|
|
|
138 |
|
|
|
229 |
|
Other assets
|
|
|
456 |
|
|
|
510 |
|
|
|
$ |
52,018 |
|
|
$ |
78,101 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
1,870 |
|
|
$ |
1,435 |
|
Accrued
liabilities
|
|
|
1,766 |
|
|
|
2,154 |
|
Accrued compensation and
benefits
|
|
|
1,471 |
|
|
|
1,988 |
|
Income taxes
payable
|
|
|
368 |
|
|
|
14 |
|
Deferred revenue
|
|
|
2,084 |
|
|
|
2,233 |
|
Current liabilities of
discontinued operations held for sale
|
|
|
9 |
|
|
|
- |
|
Total current
liabilities
|
|
|
7,568 |
|
|
|
7,824 |
|
|
|
|
|
|
|
|
|
|
Deferred
rent
|
|
|
584 |
|
|
|
477 |
|
Other
long-term liabilities
|
|
|
36 |
|
|
|
40 |
|
Net
deferred income tax liability
|
|
|
- |
|
|
|
869 |
|
Commitments
and contingencies (note 15)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value;
5,000 shares authorized;
|
|
|
|
|
|
|
|
|
no shares issued or
outstanding
|
|
|
- |
|
|
|
- |
|
Common stock, $.001 par value;
45,000 shares authorized;
|
|
|
|
|
|
|
|
|
shares outstanding: 8,361 in 2008
and 8,496 in 2007
|
|
|
8 |
|
|
|
9 |
|
Additional paid-in
capital
|
|
|
75,996 |
|
|
|
76,737 |
|
Accumulated
deficit
|
|
|
(32,174 |
) |
|
|
(7,855 |
) |
Total stockholders’
equity
|
|
|
43,830 |
|
|
|
68,891 |
|
|
|
$ |
52,018 |
|
|
$ |
78,101 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
(in
thousands, except per share data)
|
|
Year
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
revenues:
|
|
|
|
|
|
|
|
|
|
Grading, authentication and
related services
|
|
$ |
41,984 |
|
|
$ |
40,452 |
|
|
$ |
36,914 |
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of grading, authentication
and related services
|
|
|
23,773 |
|
|
|
19,297 |
|
|
|
14,890 |
|
Gross
profit
|
|
|
18,211 |
|
|
|
21,155 |
|
|
|
22,024 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
expenses
|
|
|
8,073 |
|
|
|
7,497 |
|
|
|
4,918 |
|
General and administrative
expenses
|
|
|
15,480 |
|
|
|
15,585 |
|
|
|
13,068 |
|
Impairment loss of
goodwill
|
|
|
9,064 |
|
|
|
- |
|
|
|
- |
|
Impairment loss of intangible
assets and other assets
|
|
|
2,169 |
|
|
|
55 |
|
|
|
- |
|
Amortization of intangible
assets
|
|
|
1,193 |
|
|
|
950 |
|
|
|
269 |
|
Total operating
expenses
|
|
|
35,979 |
|
|
|
24,087 |
|
|
|
18,255 |
|
Operating
income (loss)
|
|
|
(17,768 |
) |
|
|
(2,932 |
) |
|
|
3,769 |
|
Interest
income, net
|
|
|
1,117 |
|
|
|
2,144 |
|
|
|
2,346 |
|
Other
income, net
|
|
|
5 |
|
|
|
6 |
|
|
|
22 |
|
Income
(loss) before provision (benefit) for income taxes
|
|
|
(16,646 |
) |
|
|
(782 |
) |
|
|
6,137 |
|
Provision
(benefit) for income taxes
|
|
|
(1,016 |
) |
|
|
(39 |
) |
|
|
2,733 |
|
Income
(loss) from continuing operations
|
|
|
(15,630 |
) |
|
|
(743 |
) |
|
|
3,404 |
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses (net of income taxes)
|
|
|
(2 |
) |
|
|
228 |
|
|
|
296 |
|
Net
income (loss)
|
|
$ |
(15,632 |
) |
|
$ |
(515 |
) |
|
$ |
3,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(1.85 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.40 |
|
Income from discontinued
operations, net of gain on sales of discontinued
businesses (net of income taxes)
|
|
|
- |
|
|
|
0.03 |
|
|
|
0.04 |
|
Net income
(loss)
|
|
$ |
(1.85 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(1.85 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.39 |
|
Income from discontinued
operations, net of gain on sales of discontinued
businesses (net of income taxes)
|
|
|
- |
|
|
|
0.03 |
|
|
|
0.03 |
|
Net income
(loss)
|
|
$ |
(1.85 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.42 |
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,450 |
|
|
|
8,367 |
|
|
|
8,473 |
|
Diluted
|
|
|
8,450 |
|
|
|
8,367 |
|
|
|
8,782 |
|
Dividends
declared per common share
|
|
$ |
1.00 |
|
|
$ |
0.40 |
|
|
$ |
0.08 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
(in
thousands)
|
|
Common
Stock
|
|
Additional
Paid-in
|
|
Accumulated
|
|
Treasury
Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Shares
|
|
Amount
|
|
Total
|
|
Balance
at June 30, 2005
|
|
|
8,610 |
|
$ |
9 |
|
$ |
78,594 |
|
$ |
(7,016 |
) |
|
(125 |
) |
$ |
(1,021 |
) |
$ |
70,566 |
|
Exercise
of stock options
|
|
|
47 |
|
|
- |
|
|
243 |
|
|
- |
|
|
- |
|
|
- |
|
|
243 |
|
Stock
compensation expense
|
|
|
- |
|
|
- |
|
|
670 |
|
|
- |
|
|
- |
|
|
- |
|
|
670 |
|
Tax
benefit on exercise of
stock options
|
|
|
- |
|
|
- |
|
|
29 |
|
|
- |
|
|
- |
|
|
- |
|
|
29 |
|
Shares
repurchased and cancelled under the Stock Repurchase Plan
|
|
|
(182 |
) |
|
(1 |
) |
|
(2,627 |
) |
|
- |
|
|
- |
|
|
- |
|
|
(2,628 |
) |
Net
income
|
|
|
- |
|
|
- |
|
|
- |
|
|
3,700 |
|
|
- |
|
|
- |
|
|
3,700 |
|
Dividends
paid ($0.08 per share)
|
|
|
- |
|
|
- |
|
|
- |
|
|
(674 |
) |
|
- |
|
|
- |
|
|
(674 |
) |
Balance
at June 30, 2006
|
|
|
8,475 |
|
$ |
8 |
|
$ |
76,909 |
|
$ |
(3,990 |
) |
|
(125 |
) |
$ |
(1,021 |
) |
$ |
71,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
161 |
|
|
1 |
|
|
275 |
|
|
- |
|
|
- |
|
|
- |
|
|
276 |
|
Stock
compensation expense
|
|
|
- |
|
|
- |
|
|
726 |
|
|
- |
|
|
- |
|
|
- |
|
|
726 |
|
Issuance
of restricted shares
|
|
|
57 |
|
|
- |
|
|
164 |
|
|
- |
|
|
- |
|
|
- |
|
|
164 |
|
Tax
benefit on exercise
of stock options
|
|
|
- |
|
|
- |
|
|
633 |
|
|
- |
|
|
- |
|
|
- |
|
|
633 |
|
Shares
repurchased and cancelled under the Stock Repurchase Plan
|
|
|
(72 |
) |
|
- |
|
|
(949 |
) |
|
- |
|
|
- |
|
|
- |
|
|
(949 |
) |
Net
loss
|
|
|
- |
|
|
- |
|
|
- |
|
|
(515 |
) |
|
- |
|
|
- |
|
|
(515 |
) |
Retirement
of treasury shares
|
|
|
(125 |
) |
|
- |
|
|
(1,021 |
) |
|
- |
|
|
125 |
|
|
1,021 |
|
|
- |
|
Dividends
paid ($0.40 per share)
|
|
|
- |
|
|
- |
|
|
- |
|
|
(3,350 |
) |
|
- |
|
|
- |
|
|
(3,350 |
) |
Balance
at June 30, 2007
|
|
|
8,496 |
|
$ |
9 |
|
$ |
76,737 |
|
$ |
(7,855 |
) |
|
- |
|
$ |
- |
|
$ |
68,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effects of adoption of FIN 48 (see note 9)
|
|
|
- |
|
|
- |
|
|
- |
|
|
(170 |
) |
|
- |
|
|
- |
|
|
(170 |
) |
Exercise
of stock options
|
|
|
76 |
|
|
- |
|
|
242 |
|
|
- |
|
|
- |
|
|
- |
|
|
242 |
|
Stock-based
compensation - options
|
|
|
- |
|
|
- |
|
|
873 |
|
|
- |
|
|
- |
|
|
- |
|
|
873 |
|
Stock-based
compensation – restricted stock
|
|
|
21 |
|
|
- |
|
|
352 |
|
|
- |
|
|
- |
|
|
- |
|
|
352 |
|
Shares
repurchased and cancelled under the Stock Repurchase Plan
|
|
|
(232 |
) |
|
(1 |
) |
|
(2,208 |
) |
|
- |
|
|
- |
|
|
- |
|
|
(2,209 |
) |
Net
loss
|
|
|
- |
|
|
- |
|
|
- |
|
|
(15,632 |
) |
|
- |
|
|
- |
|
|
(15,632 |
) |
Dividends
paid ($1.00 per share)
|
|
|
- |
|
|
- |
|
|
- |
|
|
(8,517 |
) |
|
- |
|
|
- |
|
|
(8,517 |
) |
Balance
at June 30, 2008
|
|
|
8,361 |
|
$ |
8 |
|
$ |
75,996 |
|
$ |
(32,174 |
) |
|
- |
|
$ |
- |
|
$ |
43,830 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COLLECTORS
UNIVERSE, INC.
(in
thousands)
|
|
Year
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$ |
(15,632 |
) |
|
$ |
(515 |
) |
|
$ |
3,700 |
|
Adjustments to reconcile
net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
2,453 |
|
|
|
2,012 |
|
|
|
919 |
|
Stock-based compensation
expense
|
|
|
1,225 |
|
|
|
890 |
|
|
|
670 |
|
Impairment losses of long-lived
assets
|
|
|
11,233 |
|
|
|
55 |
|
|
|
- |
|
Tax benefit from exercise of
stock options
|
|
|
- |
|
|
|
633 |
|
|
|
29 |
|
Loss on termination of
sublease
|
|
|
- |
|
|
|
- |
|
|
|
83 |
|
Loss on intangible
asset
|
|
|
- |
|
|
|
16 |
|
|
|
- |
|
Discontinued
operations
|
|
|
2 |
|
|
|
(228 |
) |
|
|
(296 |
) |
Provision for bad
debts
|
|
|
51 |
|
|
|
27 |
|
|
|
55 |
|
Provision (recovery) for
inventory write-down
|
|
|
23 |
|
|
|
(4 |
) |
|
|
72 |
|
(Gain) loss on sale of property
and equipment
|
|
|
(4 |
) |
|
|
- |
|
|
|
8 |
|
Interest on note
receivables
|
|
|
(8 |
) |
|
|
- |
|
|
|
- |
|
Deferred income
taxes
|
|
|
(1,027 |
) |
|
|
400 |
|
|
|
1,853 |
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(180 |
) |
|
|
552 |
|
|
|
(115 |
) |
Inventories
|
|
|
(564 |
) |
|
|
10 |
|
|
|
(73 |
) |
Prepaid expenses and
other
|
|
|
31 |
|
|
|
(219 |
) |
|
|
(63 |
) |
Refundable income
taxes
|
|
|
645 |
|
|
|
(1,220 |
) |
|
|
- |
|
Other assets
|
|
|
(92 |
) |
|
|
(72 |
) |
|
|
(278 |
) |
Accounts payable and accrued
liabilities
|
|
|
44 |
|
|
|
488 |
|
|
|
403 |
|
Accrued compensation and
benefits
|
|
|
(517 |
) |
|
|
913 |
|
|
|
(164 |
) |
Income taxes
payable
|
|
|
82 |
|
|
|
(671 |
) |
|
|
496 |
|
Deferred
revenue
|
|
|
(149 |
) |
|
|
381 |
|
|
|
278 |
|
Deferred rent
|
|
|
111 |
|
|
|
75 |
|
|
|
16 |
|
Other long-term
liabilities
|
|
|
(4 |
) |
|
|
- |
|
|
|
- |
|
Net cash provided by
(used in) operating activities
|
|
|
(2,277 |
) |
|
|
3,523 |
|
|
|
7,593 |
|
Net cash provided by operating
activities of discontinued businesses
|
|
|
8 |
|
|
|
114 |
|
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property
and equipment
|
|
|
143 |
|
|
|
- |
|
|
|
8 |
|
Capital
expenditures
|
|
|
(1,961 |
) |
|
|
(3,073 |
) |
|
|
(1,366 |
) |
Purchase of businesses, net of
cash acquired
|
|
|
- |
|
|
|
(6,293 |
) |
|
|
(14,582 |
) |
Purchase of other intangible
assets
|
|
|
(20 |
) |
|
|
(352 |
) |
|
|
- |
|
Advances on customer notes
receivable
|
|
|
(7,829 |
) |
|
|
(5,038 |
) |
|
|
(4,283 |
) |
Proceeds from collection of
customer notes receivable
|
|
|
4,723 |
|
|
|
6,416 |
|
|
|
2,030 |
|
Capitalized
software
|
|
|
(1,436 |
) |
|
|
(1,483 |
) |
|
|
(421 |
) |
Cash received from sale of net
assets of discontinued operations
|
|
|
92 |
|
|
|
485 |
|
|
|
361 |
|
Net cash used in investing activities
|
|
|
(6,288 |
) |
|
|
(9,338 |
) |
|
|
(18,253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
242 |
|
|
|
276 |
|
|
|
243 |
|
Payments for retirement of
common stock
|
|
|
(2,209 |
) |
|
|
(949 |
) |
|
|
(2,628 |
) |
Dividends paid to common
stockholders
|
|
|
(8,517 |
) |
|
|
(3,350 |
) |
|
|
(674 |
) |
Net cash used in financing
activities
|
|
|
(10,484 |
) |
|
|
(4,023 |
) |
|
|
(3,059 |
) |
Decrease in cash and cash
equivalents
|
|
|
(19,041 |
) |
|
|
(9,724 |
) |
|
|
(13,329 |
) |
Cash and cash equivalents at
beginning of year
|
|
|
42,386 |
|
|
|
52,110 |
|
|
|
65,439 |
|
Cash and cash equivalents at end
of year
|
|
$ |
23,345 |
|
|
$ |
42,386 |
|
|
$ |
52,110 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COLLECTORS
UNIVERSE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(in
thousands)
|
|
Year
ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
Income
taxes paid (refund), net
|
|
$ |
(651 |
) |
|
$ |
743 |
|
|
$ |
624 |
|
Interest
paid
|
|
$ |
28 |
|
|
$ |
19 |
|
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
July 14, 2005, the Company acquired CoinFacts.com in a transaction
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
515 |
|
Purchase price
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
September 2, 2005, the Company acquired Certified Coin Exchange(CCE) in a
transaction summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net liabilities
assumed
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(41 |
) |
Deferred taxes recognized at
acquisition
|
|
|
- |
|
|
|
- |
|
|
|
(296 |
) |
Intangible
assets
|
|
|
- |
|
|
|
- |
|
|
|
947 |
|
Fair value of
computertradingpost.com, Inc., including net assets
|
|
|
- |
|
|
|
- |
|
|
|
600 |
|
Goodwill
|
|
|
- |
|
|
|
- |
|
|
|
1,117 |
|
Purchase price, net of $50 cash
acquired
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
November 8, 2005, the Company acquired Gem Certification
and
Appraisal Lab (GCAL) in a transaction summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net assets
acquired
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
119 |
|
Intangible
assets
|
|
|
- |
|
|
|
- |
|
|
|
53 |
|
Goodwill
|
|
|
- |
|
|
|
- |
|
|
|
3,068 |
|
Purchase price, net of $28 cash
acquired
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
December 22, 2005, the Company acquired the business of
GemprintCorporation in a transaction summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net assets
acquired
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
40 |
|
Intangible
assets
|
|
|
- |
|
|
|
- |
|
|
|
3,444 |
|
Goodwill
|
|
|
- |
|
|
|
1 |
|
|
|
5,099 |
|
Purchase price
|
|
$ |
- |
|
|
$ |
1 |
|
|
$ |
8,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
July 1, 2006, the Company acquired Expos Unlimited, LLC (Expos)
in
a transaction summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net liabilities
assumed
|
|
$ |
- |
|
|
$ |
(385 |
) |
|
$ |
- |
|
Intangible assets
|
|
|
- |
|
|
|
1,810 |
|
|
|
- |
|
Goodwill
|
|
|
- |
|
|
|
1,001 |
|
|
|
- |
|
Purchase price, net of $49 cash
acquired
|
|
$ |
- |
|
|
$ |
2,426 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
August 18, 2006, the Company acquired American Gemological
Laboratories,
Inc. (AGL) in a transaction summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of net liabilities
assumed
|
|
$ |
- |
|
|
$ |
(42 |
) |
|
$ |
- |
|
Deferred tax liability recognized
at acquisition
|
|
|
111 |
|
|
|
(1,205 |
) |
|
|
- |
|
Intangible assets
|
|
|
(274 |
) |
|
|
3,030 |
|
|
|
- |
|
Goodwill
|
|
|
163 |
|
|
|
2,083 |
|
|
|
- |
|
Purchase price, net of $81 cash
acquired
|
|
$ |
- |
|
|
$ |
3,866 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
In
connection with the sale of CTP in November, 2005, the Company
received
a
note receivable of $458,000, of which $230,000 and $321,000 were still
outstanding at June 30, 2008 and 2007, respectively.
In
July 2006, the Company acquired partial rights to a patent application and
recognized a liability due to the seller of $40,000 that matures no later
than July 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
1. Company
Organization and Nature of Business
Organization
Collectors
Universe, Inc. (“We,” “us,” the “Company” or “Collectors Universe”) is a
Delaware corporation that was organized on February 5, 1999 for the purpose of
enabling Professional Coin Grading Service, Inc. (“PCGS”) the Company’s
predecessor corporation to acquire other businesses that, like PCGS, would
provide services to the collectibles markets. On February 5, 1999,
Collectors Universe issued 4,327,000 shares of common stock in exchange for all
of the outstanding shares of PCGS. As a result of that exchange, the
former stockholders of PCGS became stockholders of Collectors Universe, with
each of them receiving a number of our shares based on his or her percentage
ownership of the shares of PCGS. Prior to this exchange, Collectors
Universe had no operating assets or liabilities and had not yet conducted any
operations. The assets and liabilities acquired were recorded at the
PCGS’ basis as the transaction represented a transfer of assets and liabilities
between entities under common control.
Concurrently,
with the exchange transaction with PCGS, Collectors Universe acquired the assets
of the auction businesses of Lyn F. Knight Rare Coins, Inc. (“Lyn Knight”) and
Kingswood Coin Auctions, LLC (“Kingswood”) and the minority ownership interests
in two majority-owned subsidiaries of PCGS, Superior Sportscard Auctions, LLC
(“Superior”) and Internet Universe, LLC (“IU”), that were not already owned by
PCGS at the time these acquisitions were consummated.
In fiscal
year 2005, we organized Collectors Finance Corporation (“CFC”) as a 100%
subsidiary to engage in the business of making short-term loans to collectibles
dealers pursuant to a dealer financing program. Following the receipt
in March 2005 of a California Finance Leaders License, CFC began making
short-term loans to established collectibles dealers. The loans are
secured by the delivery of coins or other collectibles to us.
In fiscal
year 2006 and 2007, the Company acquired the following businesses, the results
of operations of which have been consolidated into the financial statements of
the Company from their respective dates of acquisition:
Business
|
Acquisition
Date
|
Purchase
Price
|
CoinFacts.com
|
July
14, 2005
|
$0.5
million
|
Certified
Coin Exchange
|
September
2, 2005
|
$2.4
million
|
Gem
Certification & Appraisal Lab, LLC
|
November
8, 2005
|
$3.3
million
|
Gemprint
Corporation
|
December
22, 2005
|
$8.6
million (i)
|
Expos
Unlimited LLC
|
July
1, 2006
|
$2.5
million (i)
|
American
Gemological Laboratory
|
August
18, 2006
|
$3.9
million (i)
|
(i) Does
not include contingent purchase price that we may become obligated to pay to the
sellers of these businesses
based on their future financial performance. See note 3
below.
Nature
of our Business
We are
engaged in the business of providing third-party authentication, grading and
related services for rare and high-value collectibles consisting of coins,
vintage U.S. paper currency, sportscards, stamps, sports memorabilia and
autographs, and for high value assets consisting of diamonds and colored
gemstones. We authenticate and grade the quality of such collectibles
and high value assets for dealers, collectors and retail buyers and sellers of
these collectibles and high value assets. We also publish magazines
that provide market prices and information for certain collectibles and high
value assets, that is accessible on our websites and sell advertising in those
magazines and on those websites; own the CCE subscription business, which
operates an online market for graded collectible coins for dealers who subscribe
to this service; and promote, manage and operate collectibles
tradeshows.
During
the period from 1999 through the latter part of fiscal 2004, we also were
engaged in the business of marketing and selling high-end collectible coins,
sportscards and sports entertainment and historical memorabilia. Most
of those sales were made at multi-venue auctions that were conducted by our
collectibles sales divisions. We also sold collectible coins by
direct sales methods.
In
December 2003, our Board of Directors adopted a plan to focus our financial and
management resources and collectibles expertise, on the operations and growth of
our authentication and grading businesses, by divesting the collectibles
auctions and direct sales businesses comprising our collectibles sales
segment. As a result, in the accompanying consolidated financial
statements, the assets and related liabilities of the collectibles sales segment
have been classified as held for sale and the related operating results have
been classified as discontinued operations in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets. See note 4 below.
2. Summary
of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of
Collectors Universe, Inc. and its subsidiaries, all of which are 100% owned by
the Company. At June 30, 2008, such operating subsidiaries were
Collectors Finance Corporation (CFC), Certified Asset Exchange, Inc. (CAE), Gem
Certification and Assurance Lab, Inc. (GCAL), Expos Unlimited, Inc. (Expos), and
American Gemological Laboratories, Inc. All significant inter-company
accounts and transactions have been eliminated in consolidation.
In June
2008, we merged PCGS, our predecessor corporation that had been one of our
wholly-owned subsidiaries since 1999, into the Company. Prior to that
merger, substantially all of the business of PCGS had been, and all of the
business of PCGS is now, operated as a division of Collectors
Universe.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that can affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
results expected on the basis of those estimates, and such differences could be
material to our future results of operations and financial
condition. Examples of such estimates that could be material include
determinations made with respect to the capitalization of software development
costs, the valuation of stock-based compensation awards, the amount of goodwill
and the existence or non-existence of goodwill impairments, the amounts to be
set aside for warranty reserves and the amount of the provisions or benefits for
income taxes. Because we have incurred significant operating losses
in our jewelry reporting units since the acquisitions of these businesses, and
such losses have significantly exceeded our initial estimates for fiscal 2008
and 2009 year to date, we tested the carrying value of goodwill and other
long-lived assets of our jewelry businesses for impairment at June 30, 2008 and
recorded an aggregate impairment loss of approximately $11,233,000 for goodwill
and other intangible and tangible assets in the Consolidated Statements of
Operations for the year ended June 30, 2008. Due to the early stage
of our jewelry businesses, significant risk and uncertainty exists around
estimating the level and timing of future revenues of these
businesses. Such estimates of revenue will significantly impact the
expected level of future cash flows from those businesses, which is used in
determining whether the fair value of those businesses are less than the
carrying amount of the assets of those businesses. The carrying value
of goodwill related to our jewelry businesses could become further impaired, and
the Company’s financial position and results of operations could be materially
adversely affected in future periods. Each of these estimates are
discussed in more detail in this note 2, note 3 and note 7 to these Consolidated
Financial Statements, and in the Critical Accounting Policies and Estimates
section of Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, contained elsewhere in this Report.
Cash
and Cash Equivalents
We
consider all highly liquid investments with original maturities of three months
or less at the date of purchase to be cash and cash equivalents. At
June 30, 2008 and 2007, we had approximately $23,300,000 and $42,400,000,
respectively, classified as cash and cash equivalents on the consolidated
balance sheets, of which approximately $21,500,000 and $40,900,000,
respectively, were invested primarily in high-quality money market
funds. Our investment policy provides that the minimum credit quality
of any portfolio of trading
securities
in which we may temporarily invest cash may not be rated less than single-A long
term or A1/P1 short term, and any such portfolio may not contain more than 25%
exposure to securities of issuers whose principal business activities are in the
same industry. However, the 25% limitation does not apply to
securities guaranteed by the U.S. government or to obligations issued by banks
that are subject to U.S. banking regulations. In addition, the
weighted average maturity of any such portfolio may not exceed 90
days.
Concentrations
Credit
Risks. Financial instruments that potentially subject the
Company to significant concentrations of credit risk at June 30, 2008 consisted
primarily of cash and cash equivalents, accounts receivables and notes
receivables.
Financial Instruments and Cash
Balances. At June 30, 2008 and 2007, the Company had funds of
approximately $21,500,000 and $40,900,000, respectively, in money market
funds. In addition, at June 30, 2008 and 2007, the Company had
approximately $1,800,000 and $1,500,000 in a non-interest bearing bank account
for general day-to-day operations.
Accounts
Receivable. A substantial portion of accounts receivable is
due from collectibles dealers. At June 30, 2008, accounts receivable
from three customers represented 37% of the Company’s total gross accounts
receivable balances. At June 30, 2007, accounts receivable from one
customer represented 13% of the Company’s total gross accounts receivable
balances. We perform an analysis of the expected collectability of
accounts receivable based on several factors, including the age and extent of
significant past due accounts and economic conditions or trends that may impact
the ability of the debtor to pay their account receivable
balances. Based on such review, we establish an allowance for
doubtful accounts, when necessary. The allowance for doubtful
accounts receivable was $79,000 and $60,000 at June 30, 2008 and June 30, 2007,
respectively.
Customers. The
authentication and grading of collectible coins and related services accounted
for approximately 55%, 58% and 65% of our net revenues for the years ended June
30, 2008, 2007 and 2006, respectively.
Customer Notes Receivable. At
June 30, 2008 and 2007, the outstanding principal amount of customer notes
receivable, which evidenced primarily short term advances made to customers by
CFC, totaled $5,640,000 (of which, $3,579,000 was classified as held for sale at
June 30, 2008) and $2,536,000, respectively, net of allowances for uncollectible
amounts of $31,000 and $23,000, respectively. Three and two of these notes, each
greater than 10% of the total respective year ending balances for all notes
outstanding represented a total of 49% and 68% of the total principal amounts of
the short-term customer advances that were outstanding at June 30, 2008 and
2007, respectively.
Suppliers. We
purchase injection-molded parts, holograms and printed labels for our grading
services. There are numerous suppliers for these items and, as a
result, it is possible to change suppliers without significant delay or cost to
the Company. However, while there are numerous sources for
injection-molded parts, these parts require a die to fabricate the
part. The manufacturing of high precision dies can be a lengthy
process and requires considerable expertise in their
fabrication. Although, we do not have back-up dies for some of our
high volume injection-molded parts and we rely on one supplier for these
requirements, we believe that this supplier maintains a large enough inventory
of the injection-molded parts to allow time for us to have new molds
manufactured for us by other suppliers should the need to do so
arise.
Fair
Value of Financial Instruments
The
carrying value of cash and cash equivalents, accounts receivable, customer notes
receivable, receivables from sale of net assets of discontinued operations,
accounts payable and accrued liabilities approximate their respective fair
values due to the short-term nature of such instruments. The carrying
value of the note receivable related to the sale of a discontinued operation
approximates fair value, as the interest rate on such note approximates an
amount that would be extended to parties with similar credit risk and remaining
maturities.
Inventories
Our
inventories consist primarily of (i) our coin and stamp collectibles
inventories, and (ii) consumable supplies that we use in our continuing
authentication and grading businesses. We account for those
collectibles inventories under the specific identification
method. Inventories are valued at the lower of cost or
market. Inventories are periodically reviewed to identify slow moving
items, and the allowance for inventory loss is recognized, as
necessary. The allowance for inventory loss was $91,000 at June 30,
2008 and 2007, respectively. It is possible that our estimates of
market value could change in the near term due to market conditions in the
various collectibles markets served by the Company which could require us to
increase that allowance.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives ranging
from three to seven years. Leasehold improvements are amortized over
the shorter of the estimated useful lives of the improvements or the term of the
related lease. Coin, stamp, diamond and colored gemstone reference
sets are non-depreciable assets. Repair and maintenance costs are expensed as
incurred.
Long-Lived
Assets
Management
regularly reviews property and equipment and other long-lived assets, including
certain identifiable intangibles, for possible impairment. This
review occurs annually, or more frequently if events or changes in circumstances
indicate the carrying amount of the asset may not be recoverable in
full. If there is indication of impairment of property, equipment or
amortizable intangible assets, then management would prepare an estimate of
future undiscounted cash flows expected to result from the use of that asset and
its eventual disposition. If these cash flows are less than the
carrying amount of the asset, an impairment loss would be recognized to write
down the asset to its estimated fair value. The fair value would be
estimated using the present value of the future cash flows discounted at a rate
commensurate with management’s estimates of the business
risks. During fiscal years 2008 and 2007, approximately $2,169,000
and $55,000, respectively, were recorded as impairment losses of long-lived
assets, other than goodwill, within the Consolidated Financial Statements for
those years. The impairment loss in fiscal year 2008 related to goodwill was
approximately $9,064,000 (See “Goodwill and Other Intangible
Assets” below). Of the $2,169,000 impairment loss for long-lived assets
other than goodwill (principally identifiable intangible assets), approximately
$176,000 was associated with property and equipment (see also note 7), and
$133,000 was associated with other assets determined not to be recoverable as of
June 30, 2008.
Revenue
Recognition
Net
revenues consist primarily of fees generated from the authentication and grading
of coins, sportscards, autographs, currency, stamps, diamonds and colored
gemstones. Authentication and grading revenues are recognized when
those services have been performed by us and the item is shipped back to the
customer. Authentication and grading fees generally are prepaid,
although we offer open account privileges to larger dealers. Advance
payments received for grading services are deferred until the service is
performed and the graded item is shipped to the customer. In the case
of dealers to whom we have extended credit, we record revenues at the time the
item is shipped to the customer. With respect to our Expos trade show
business, we recognize revenue generated by the promotion, management and
operation of collectibles conventions and trade shows in the periods in which
the shows take place.
A portion
of our net revenues are comprised of subscription fees paid by customers for a
membership in our Collectors Club. Those memberships entitle members
access to our on-line and printed publications, and sometimes also to vouchers
for free grading services. We record revenue for this multi-element
service arrangement in accordance with EITF 00-21, Accounting for Revenue
Arrangements With Multiple Deliverables, by recognizing approximately 60%
of the subscription fee in the month following the membership purchase, on the
basis that Collectors Club members typically utilize their vouchers for free
grading services within 30 days of subscribing for memberships. The
balance of the membership fee is recognized as revenue over the life of the
membership, which can range from one to two years. We evaluate, at
least semi-annually, the relative fair values of the deliverables and the
percentage factors used to allocate the membership fee between the grading and
the publication services provided under this membership service.
We recognize product sales when items
are shipped and all the requirements of Staff Accounting Bulletin No. 104, Revenue Recognition, issued
by the Securities and Exchange Commission (“SEC”), have been
satisfied. Product revenues consist primarily of collectible coins
that we purchased pursuant to our coin authentication and grading warranty
program and are not considered an integral part of the Company’s on-going
revenue generating activities.
Shipping
and Handling Costs
Shipping and handling costs incurred to
return to our customers their collectibles property submitted to us for grading
or authentication are recorded as costs of revenues, net of amounts received
from such customers.
Cooperative Marketing
Arrangements
In accordance with EITF 01-09, Accounting for Consideration Given
By a Vendor to a Customer (Including a Reseller of the Vendor’s
Products), marketing allowances given to a customer have been classified
as a reduction of revenues in the years ended June 30, 2007 and
2006. There were no marketing allowances given to customers’ in
fiscal 2008.
Warranty
Costs
We offer
a warranty covering the coins, sportscards, stamps and currency that we
authenticate and grade. Under the warranty, if any collectible that
was previously authenticated and graded by us is later submitted to us for
re-grading and either (i) receives a lower grade upon that resubmittal or
(ii) is determined not to have been authentic, we will offer to purchase
the collectible, or, in the alternative, at our option, pay the difference in
value of the item at its original grade as compared with its lower
grade. However, this warranty is voided if the collectible, upon
resubmittal to us, is not in the same tamper-resistant holder in which it was
placed at the time we last graded it. We also offer a similar grading
warranty of two years’ duration, and subject to certain limitations, covering
the diamonds that we authenticate and grade. We accrue for estimated
warranty costs based on historical trends and related experience. We
monitor the adequacy of our warranty reserves on an on-going basis and
significant claims resulting from resubmissions receiving lower grades or deemed
not to be authentic could result in a material adverse impact on our results of
operation.
Advertising
Costs
Advertising
costs are expensed as incurred and amounted to approximately $1,136,000,
$1,122,000 and $620,000 in the fiscal years ended June 30, 2008, 2007 and 2006,
respectively.
Income
Taxes
We
account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes
and FIN 48, Accounting for
Uncertainty in Income Taxes – An Interpretation of FASB Statement No.
109. SFAS No. 109 requires the recording of deferred tax
assets and liabilities for the future consequences of events that have been
recognized in the Company’s financial statements or tax
returns. Measurement of the deferred items is based on enacted tax
laws. In the event the future consequences of differences between
financial reporting bases and tax bases of the Company’s assets or liabilities
result in a deferred tax asset, SFAS No. 109 requires that we evaluate the
probability of realizing the future benefits comprising that
asset. In fiscal 2008, we recorded a valuation allowance for deferred
tax assets of approximately $4,550,000, as we determined that it was more likely
than not that we would not recover deferred tax assets related to the impairment
losses of goodwill and other intangible assets and the California Enterprise
Zone Credits. FIN 48 clarifies the accounting for uncertainty in tax
positions and prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return and, in addition, requires us to disclose
our policy for the classification of interest and penalties in our Statements of
Operations. FIN 48 requires that we adjust our financial
statements to reflect only those tax positions that are more-likely-than-not to
be sustained on audit, based on the technical merits of the
position. FIN 48 further requires that any necessary adjustment
be recorded directly to the beginning balance of retained earnings or
accumulated deficit in the period of adoption of FIN 48 and reported as a
change in accounting principle, if material. During the first quarter
of fiscal 2008, the cumulative effects of applying FIN 48 were recorded as
an increase of $170,000 to accumulated deficit, an increase to income taxes
payable of $279,000 and an increase in deferred tax assets of $109,000 and those
adjustments are reflected in the Consolidated Balance Sheet as of June 30,
2008. Interest and penalties totaled $101,000 as of July 1, 2007, the
date of the adoption of FIN 48, and were accounted for as part of the total
adjustment to accumulated deficit of $170,000. During fiscal year
2008, which followed the adoption of FIN 48, we recorded approximately
$13,000 in interest and penalties as a component of income tax
expense.
Capitalized
Software
Through
June 30, 2008 end 2007, we had capitalized approximately $2,543,000 and
$1,700,000, respectively as capitalized software net of accumulated amortization
of $797,000 and $204,000 respectively, in accordance with SOP 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1
requires that certain costs incurred, either from internal or external sources,
be capitalized as part of intangible assets and amortized on a straight-line
basis over the useful life of the software. During fiscal years 2008,
2007 and 2006, the Company recorded approximately $591,000, $193,000 and
$11,000, respectively, as amortization expense for certain software development
projects that were completed. Planning, training, support and
maintenance costs incurred either prior to or following the implementation phase
are recognized as expense in the period in which they occur. The
Company evaluates the carrying values of capitalized software to determine if
the carrying values are impaired, and, if necessary, an impairment loss is
recorded in the period in which the impairment is determined to have
occurred.
Stock-Based
Compensation
Effective
July 1, 2005, which was the first day of the Company’s fiscal year 2006, the
Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using
the modified-prospective transition method. Under this method,
compensation cost recognized in each of the fiscal years ended June 30, 2008,
2007 and 2006 include: (a) compensation cost for all share-based payments
granted and not vested prior to July 1, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation cost for all share-based payments granted subsequent to June 30,
2005 based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R).
Since
stock-based compensation expense recognized in the Consolidated Statements of
Operations for the fiscal years ended June 30, 2008, 2007 and 2006 is based on
awards expected to vest, the compensation expense has been reduced for estimated
forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. The Company considers
historical forfeiture experience to be one of several indicators of future
forfeitures and has reduced the forfeiture rate from 10.5% at June 30, 2006, to
9% at June 30, 2007 and to 5% at June 30, 2008.
For stock
option grants, we calculate stock-based compensation by estimating the fair
value of each option using the Black-Scholes option pricing
model. Our determination of the fair values of such stock option
awards is made as of their respective dates of grant using that option pricing
model and that determination is affected by our stock price as well as
assumptions regarding a number of subjective variables. These
variables include, but are not limited to, expected stock price volatility over
the term of the awards, the expected term of the options, the dividend yield and
actual and projected employee stock option exercise behavior. The
Black-Scholes option pricing model was developed for use in estimating the value
of traded options that have no vesting or hedging restrictions and are fully
transferable. Because the Company’s employee stock options have
certain characteristics that are significantly different from traded options,
the Black-Scholes option pricing model may not provide an accurate measure of
the fair value of the outstanding stock options. Although the fair
value of employee stock options is determined in accordance with SFAS No. 123(R)
using an option-pricing model, that fair value also may not be indicative of the
fair value that would be paid in a willing buyer/willing seller market
transaction.
The
calculated compensation cost, net of estimated forfeitures, is recognized on a
straight-line basis over the vesting period of the option beginning as of the
adoption date of SFAS No. 123(R), which was July 1, 2005, or the date the option
was granted, whichever date occurred later.
We issue
stock options and restricted stock to employees and outside directors whose only
condition for vesting is continued employment or service during the related
vesting period. Typically, the vesting period is four years for
employee awards and six months to one year for director awards, although awards
are sometimes granted with immediate vesting or longer vesting
periods. The term of the options may not exceed ten years; however,
an optionee’s options will terminate sooner in the event of a cessation of the
optionee’s service with the Company prior to the expiration date of the
option. During fiscal years 2007 and 2008, the Company awarded an
aggregate of 56,760 and 21,359 shares of restricted stock, respectively, to the
Company’s CEO and CFO and to the non-management directors, and in connection
with those awards, recorded, as part of general administrative expenses in the
Consolidated Statements of Operations for the years ended June 30, 2007 and
2008, respectively, approximately $164,000 and $352,000 in stock-based
compensation expense. Compensation expense is determined for the
issuance of restricted shares to employees or non-employee directors by
amortizing over the requisite service period, or the vesting period, the
aggregate fair value of the restricted shares awarded based on the closing price
of the Company’s common stock effective on the date the award is
made.
We
recognized stock-based compensation (which includes compensations costs related
to the issuance of restricted stock and stock option grants) of $1,225,000,
$890,000 and $670,000 during fiscal 2008, 2007 and 2006,
respectively. Stock-based compensation is recorded as part of
(i) costs of sales, in the case of stock awards granted to employees whose
costs are classified as cost of revenues, (ii) selling and marketing
expenses in the case of stock awards granted to marketing and sales personnel
and (iii) general and administrative expenses in the case of stock awards
granted to directors, executive and financial management and administrative
personnel, as follows:
|
|
Year
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cost
of
revenues
|
|
$ |
339,000 |
|
|
$ |
194,000 |
|
|
$ |
302,000 |
|
Selling
and marketing
expenses
|
|
|
(7,000 |
) |
|
|
8,000 |
|
|
|
1,000 |
|
General
and administrative expenses
|
|
|
893,000 |
|
|
|
688,000 |
|
|
|
367,000 |
|
|
|
$ |
1,225,000 |
|
|
$ |
890,000 |
|
|
$ |
670,000 |
|
The
weighted-average grant date fair values of employee stock options granted during
the fiscal years ended June 30, 2008, 2007 and 2006 were $3.80, $5.56 and $6.57,
respectively, which were determined using the Black-Scholes option pricing model
and the following weighted-average assumptions:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Dividend
yield
|
|
|
6.9 |
% |
|
|
2.6 |
% |
|
|
2.3 |
% |
Expected
volatility
|
|
|
48.0 |
% |
|
|
51.0 |
% |
|
|
58.0 |
% |
Risk-free
interest rate
|
|
|
3.9 |
% |
|
|
4.6 |
% |
|
|
4.7 |
% |
Expected
lives
|
|
6.0 years
|
|
|
5.1 years
|
|
|
5.1 years
|
|
Beginning
with the fourth quarter of fiscal year 2006, we have made consecutive quarterly
dividend payments to our stockholders, and, accordingly, we have incorporated a
dividend yield assumption in the determination of the fair value of stock
options granted using the Black-Scholes option pricing model. For those options
granted during fiscal years 2008, 2007 and 2006, the dividend yield assumptions
were 6.9%, 2.6% and 2.3%, respectively, which were determined by computing the
percentage of the annual dividend rate per share to the closing price of the
Company’s common stock on the date of the grant.
The
Company uses historical averages to determine the expected term of an option,
which considers such variables as the minimum expected term and post-vesting
behavior, and, as a result, increased the expected term of those options granted
in fiscal year 2008 to 6.0 years from 5.1 years, which was applied to those
grants made in fiscal years 2007 and 2006.
The total
amount of compensation expense related to unvested stock option and restricted
stock awards not yet recognized at June 30, 2008 was $1,056,000 and that amount
will be recognized as compensation expense as follows:
Fiscal
Year Ending June 30,
|
|
Amount
|
|
2009
|
|
|
645,000 |
|
2010
|
|
|
271,000 |
|
2011
|
|
|
124,000 |
|
2012
|
|
|
16,000 |
|
|
|
$ |
1,056,000 |
|
However,
such amounts, which are non-cash expenses, do not include the cost of new stock
options or stock awards that may be granted in future periods nor any changes in
the Company’s forfeiture percentage.
SFAS No. 123(R) requires the cash flows
from the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. There were no such excess tax
benefits resulting from the exercise of stock options for the fiscal years ended
June 30, 2008, 2007 and 2006.
Net Income (Loss) Per
Share
We
compute net income or loss per share in accordance with SFAS No. 128, Earnings Per
Share. SFAS No. 128 requires the presentation of basic
and diluted earnings per share. Basic net income per share is
computed by dividing net income attributable to common stockholders by the
weighted-average number of common shares outstanding during the periods
presented. Diluted net income per share is computed by dividing net
income attributable to common stockholders by the weighted-average number of
common and common equivalent shares outstanding during the period presented
assuming the exercise of all outstanding stock options and other dilutive
securities. However, options with exercise prices that exceed the
average market price of the Company’s shares for any period for which the
calculation of diluted net income per share is made are disregarded, because
they are non-dilutive in their effect.
The
following table sets forth the computation of basic and diluted net income
(loss) per common share (in thousands except per share data):
|
|
Year
Ended June 30,
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Income
(loss) from continuing operations
|
|
$ |
(15,630 |
) |
|
$ |
(743 |
) |
|
$ |
3,404 |
|
Income
from discontinued operations, net of gain on sales ofdiscontinued
businesses (net of income taxes)
|
|
|
(2 |
) |
|
|
228 |
|
|
|
296 |
|
Net
income (loss)
|
|
$ |
(15,632 |
) |
|
$ |
(515 |
) |
|
$ |
3,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing
operations
|
|
$ |
(1.85 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.40 |
|
From discontinued operations,
net of gain on sales of discontinued
businesses (net of income taxes)
|
|
|
- |
|
|
|
0.03 |
|
|
|
0.04 |
|
Net income
(loss)
|
|
$ |
(1.85 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing
operations
|
|
$ |
(1.85 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.39 |
|
From discontinued operations,
net of gain on sales ofdiscontinued businesses (net of income
taxes)
|
|
|
- |
|
|
|
0.03 |
|
|
|
0.03 |
|
Net income
(loss)
|
|
$ |
(1.85 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,450 |
|
|
|
8,367 |
|
|
|
8,473 |
|
Effect of dilutive
shares
|
|
|
- |
|
|
|
- |
|
|
|
309 |
|
Diluted
|
|
|
8,450 |
|
|
|
8,367 |
|
|
|
8,782 |
|
Options
and warrants to purchase approximately 1,073,000, 1,062,000 and 689,000 shares
of common stock for the years ended June 30, 2008, 2007 and 2006, respectively,
at exercise prices up to $24.00 per share, were not included in the computation
of diluted earnings per share because the respective exercise prices of those
options and warrants were greater than the average market price of our shares
for the respective period.
Comprehensive
Income
The
Company does not have any items of other comprehensive income requiring separate
disclosure.
Goodwill
and Other Intangible Assets
In
accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, the Company is required to evaluate the carrying value of its
goodwill and certain indefinite-lived intangible assets at least annually for
impairment, or more frequently if facts and circumstances indicate that
impairment has occurred. Management formally evaluates the carrying
value of its goodwill and other indefinite-lived intangible assets for
impairment on the anniversary date of each of the acquisitions that gave rise to
the recording of such assets. If the carrying value of a “reporting unit”, as
defined by SFAS No. 142 as an operating segment of an entity that contains
goodwill, is determined to be less than the fair value of the reporting
unit,
there exists the possibility of impairment of goodwill. An impairment loss of
goodwill is measured in two steps by allocating first the current fair value of
the reporting unit to net assets and liabilities including recorded and
unrecorded other intangible assets to determine the implied carrying value of
goodwill. The next step is to measure the difference between the
carrying value of goodwill and the implied carrying value of goodwill, and, if
the implied goodwill is less than the carrying value of goodwill, record an
impairment loss of goodwill as the difference between the implied and carrying
value amounts on the Consolidated Statements of Operations in the period in
which the impairment is determined.
During
fiscal year 2008, we completed our annual review of the carrying value of
goodwill acquired with the acquisitions of CoinFacts, Inc. (“CFI”) and Certified
Coin Exchange (“CCE”), which were consummated during fiscal year 2006 and Expos,
which we acquired in fiscal year 2007 and, on the basis of those reviews,
determined that no impairments had occurred. Following the
acquisitions of GCAL and Gemprint in fiscal year 2006 and Diamond ID (“DID”) in
fiscal 2007 for the purpose of performing goodwill impairment testing, we
combined GCAL, DID and Gemprint (the “GCAL Reporting Unit”) into the same
reporting unit, as the operating characteristics of those businesses and market
opportunities are very similar. During prior quarters of fiscal 2008, we had
completed the annual impairment testing for this reporting unit and AGL and
determined on the basis of those tests that no impairment existed in either
reporting unit. We determined during the fourth quarter of fiscal 2008 that the
continued significant losses by these reporting units, the inability of these
reporting units to meet or exceed projections set forth in the most recent
annual impairment tests and the uncertainty of future revenues, income and
related cash flows, constituted a “triggering event” as provided by SFAS No. 142
and SFAS No. 144 Accounting
for the Impairment or Disposal of Long-Lived Assets and that the
measurement of an implied carrying value of goodwill and associated impairment
loss was required. Under SFAS No. 144, long-lived assets that are subject to
depreciation or amortization over their useful lives are first tested for
impairment prior to any testing for goodwill under SFAS No. 142. During fiscal
2008, approximately $2,169,000 was recorded as an impairment loss related to
long-lived assets other than goodwill, of which approximately $1,817,000 was
related to the GCAL Reporting Unit and $352,000 was related to AGL.
Using an
income approach such as a discounted cash flow model and other market indicators
of fair value, we determined at June 30, 2008 that the fair value of the GCAL
Reporting Unit was approximately $6,000,000 and AGL’s fair value was
approximately $2,200,000 as compared to the carrying values, as of the same
date, of these units that were approximately $13,600,000 and $4,200,000,
respectively. The fair values of the net assets and liabilities including
recorded and unrecorded other intangible assets as of the same date were
approximately $5,101,000 and $1,751,000 for the GCAL Reporting Unit and AGL,
respectively, which gave rise to the implied carrying values of goodwill of
$899,000 and $449,000, respectively. The then carrying values of goodwill of
$8,166,000 and $2,246,000 for the GCAL Reporting Unit and AGL, respectively, as
compared to the implied carrying values gave rise to the impairment losses of
goodwill of $7,267,000 and $1,797,000, respectively.
The
following table sets forth, by reporting unit, the amounts classified as
goodwill and intangible assets, net, on our balance sheets as of June 30, 2007
and 2008 in thousands of dollars:
|
|
Coins
|
|
|
GCAL
Reporting
Unit
|
|
|
AGL
|
|
|
Expos
|
|
|
CCE
and
Other
|
|
|
Total
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2006
|
|
$ |
515 |
|
|
$ |
8,167 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,117 |
|
|
$ |
9,799 |
|
Acquired
during FY2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGL
|
|
|
- |
|
|
|
- |
|
|
|
2,083 |
|
|
|
- |
|
|
|
- |
|
|
|
2,083 |
|
Expos Unlimited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,001 |
|
|
|
- |
|
|
|
1,001 |
|
Gemprint
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
Balance
at June 30, 2007
|
|
$ |
515 |
|
|
$ |
8,168 |
|
|
$ |
2,083 |
|
|
$ |
1,001 |
|
|
$ |
1,117 |
|
|
$ |
12,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
during FY2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGL
|
|
|
- |
|
|
|
- |
|
|
|
163 |
|
|
|
- |
|
|
|
- |
|
|
|
163 |
|
CCE
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(7 |
) |
|
|
(7 |
) |
Gemprint
|
|
|
- |
|
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2 |
) |
Impairment
loss during FY2008
|
|
|
- |
|
|
|
(7,267 |
) |
|
|
(1,797 |
) |
|
|
- |
|
|
|
- |
|
|
|
(9,064 |
) |
Balance
at June 30, 2008
|
|
$ |
515 |
|
|
$ |
899 |
|
|
$ |
449 |
|
|
$ |
1,001 |
|
|
$ |
1,110 |
|
|
$ |
3,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets, Net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2006
|
|
$ |
29 |
|
|
$ |
3,365 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,280 |
|
|
$ |
4,674 |
|
Acquired
during FY2007 with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGL, net of $16
loss
|
|
|
- |
|
|
|
- |
|
|
|
1,914 |
|
|
|
- |
|
|
|
- |
|
|
|
1,914 |
|
Expos Unlimited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
740 |
|
|
|
- |
|
|
|
740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
during FY2007 with definite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGL
|
|
|
- |
|
|
|
- |
|
|
|
1,100 |
|
|
|
- |
|
|
|
- |
|
|
|
1,100 |
|
Expos Unlimited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,070 |
|
|
|
- |
|
|
|
1,070 |
|
Diamond I.D.
|
|
|
- |
|
|
|
332 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
332 |
|
CCE
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2 |
|
|
|
2 |
|
Less: amortization for
FY2007
|
|
|
(29 |
) |
|
|
(297 |
) |
|
|
(98 |
) |
|
|
(110 |
) |
|
|
(223 |
) |
|
|
(757 |
) |
Capitalized
software costs during FY2007
|
|
|
523 |
|
|
|
658 |
|
|
|
- |
|
|
|
- |
|
|
|
302 |
|
|
|
1,483 |
|
Less:
amortization for FY2007
|
|
|
(111 |
) |
|
|
(45 |
) |
|
|
- |
|
|
|
- |
|
|
|
(37 |
) |
|
|
(193 |
) |
Balance
at June 30, 2007
|
|
$ |
412 |
|
|
$ |
4,013 |
|
|
$ |
2,916 |
|
|
$ |
1,700 |
|
|
$ |
1,324 |
|
|
$ |
10,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
by GCAL in FY2008 with definite life
|
|
|
- |
|
|
|
20 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
20 |
|
Less: amortization for
FY2008
|
|
|
- |
|
|
|
(328 |
) |
|
|
(114 |
) |
|
|
(110 |
) |
|
|
(50 |
) |
|
|
(602 |
) |
Less: fair value adjustment of
AGL purchase price
|
|
|
- |
|
|
|
- |
|
|
|
(274 |
) |
|
|
- |
|
|
|
- |
|
|
|
(274 |
) |
Capitalized software costs during
FY2008
|
|
|
47 |
|
|
|
97 |
|
|
|
- |
|
|
|
- |
|
|
|
1,292 |
|
|
|
1,436 |
|
Less:
amortization for FY2008
|
|
|
(165 |
) |
|
|
(216 |
) |
|
|
- |
|
|
|
- |
|
|
|
(210 |
) |
|
|
(591 |
) |
Impairment loss during
FY2008
|
|
|
- |
|
|
|
(1,508 |
) |
|
|
(352 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,860 |
) |
Balance at June 30,
2008
|
|
$ |
294 |
|
|
$ |
2,078 |
|
|
$ |
2,176 |
|
|
$ |
1,590 |
|
|
$ |
2,356 |
|
|
$ |
8,494 |
|
Amortization
expense for each of the five succeeding years relating to intangible assets with
definite lives currently recorded in the Consolidated Balance Sheets is
estimated to be as follows at June 30:
2009
|
|
$ |
1,498,000 |
|
2010
|
|
$ |
1,412,000 |
|
2011
|
|
$ |
972,000 |
|
2012
|
|
$ |
545,000 |
|
2013
|
|
$ |
467,000 |
|
The
weighted average amortization period remaining as of June 30, 2008 is
approximately 6.0 years.
Approximately
$2.4 million of the $4.0 million classified as goodwill on the Consolidated
Balance Sheets at June 30, 2008 is amortizable and deductible for tax purposes
over a period of 15 years.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations
(Revised). This standard will replace SFAS No. 141, Business Combinations, but
will retain the fundamental requirements in Statement 141 that the acquisition
method (which Statement 141 called the purchase method) be used for
all business combinations and for an acquirer to be identified for each business
combination. Changes being made by Statement 141(R) to
previously issued authoritative guidance include requiring that: (i) assets
and liabilities arising from contingencies be recognized at fair value as of the
date of the acquisition as opposed to future periods when, or if, any or all of
the contingencies may be resolved, (ii) certain pre-acquisition related
costs (such as those that were previously accounted for as part of the
acquisition) be accounted for outside of the acquisition, and
(iii) tangible and intangible assets acquired at the time of the
acquisition related to in-process research and development be accounted for as
an asset and carried at fair value at the time of the acquisition and subject to
impairment testing. SFAS No. 141(R) will apply to all business
combinations for which the acquisition date occurs after the beginning of the
first reporting period following December 15, 2008. Earlier adoption
is prohibited. Statement 141(R) has no impact on recent
acquisitions completed by the Company.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an Amendment of ARB
No. 51. This Statement amends ARB No. 51 to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary, usually referred to as minority interests and for
the deconsolidation of such subsidiaries. This statement also
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. This statement is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. Earlier adoption is
prohibited. Statement 160 has no impact on the Company, as all of our
subsidiaries are wholly-owned by us.
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an Amendment of FASB Statement No. 133.
SFAS No. 161 expands the current disclosure requirements of SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities, such that entities must now provide
enhanced disclosures on a quarterly basis regarding how and why the entity uses
derivatives; how derivatives and related hedged items are accounted for under
SFAS No. 133 and how derivatives and related hedge items affect the entity’s
financial position, performance and cash flow. Pursuant to the
transition provisions of the Statement, the Company will adopt SFAS No. 161 in
fiscal year 2009. This Statement is not expected to have an impact on
the Company’s results of operations or financial condition.
On
November 5, 2007, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) No. 109 that supersedes SAB No. 105, Application of Accounting Principles
to Loan Commitments. SAB No. 105 stated that, in the view
of the SEC Staff, when measuring the fair value of a derivative loan commitment,
it would be inappropriate to incorporate the expected net future cash flows
related to the associated servicing of the loan. This SAB supersedes
SAB No. 105 and expresses the current view of the SEC Staff that,
consistent with the guidance in SFAS No. 156, Accounting for Servicing of
Financial Assets, and SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, the expected net future cash flows
related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value
through earnings. SAB No. 109 has no impact on the Company’s results
of operations or financial condition.
On
December 21, 2007, the SEC issued SAB No. 110 in which the SEC updated its
position in SAB 107 concerning the use of a “simplified” method to
calculate the expected term used in the determination of the fair value of a
stock option using the Black-Scholes-Merton closed-form model. Under
SAB No. 107, the SEC had limited the use of the “simplified” approach until
December 31, 2007 under the assumption that registrants would be able to develop
adequate factual histories instead of relying upon a simplified approach. Under
SAB No. 110, use of the simplified approach is permitted beyond December
31, 2007 under certain circumstances. SAB No. 110 has no impact
on our determination of the expected term assumption used in the
Black-Scholes-Merton model, as the Company has not previously utilized the
simplified method.
In April
2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets
. FSP 142-3 must be applied prospectively to all intangible assets
acquired as of and subsequent to fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is
prohibited. FSP 142-3 has no impact on recent acquisitions completed by the
Company.
In May
2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and provides entities with a framework for selecting the
principles used in preparation of financial statements that are presented in
conformity with generally accepted accounting principles. The adoption of SFAS
162 is not expected to have a material impact on the Company’s financial
statements.
On July
14, 2005, we acquired substantially all the assets of CoinFacts.com for $500,000
in cash and $15,000 in directly-related costs. CoinFacts.com operates
an Internet website on which it publishes detailed proprietary historical
information on U.S. coins. The amount of $515,000 was classified as
goodwill at June 30, 2008 and 2007.
On
September 2, 2005, we acquired all of the common stock of Certified Coin
Exchange and all of the common stock of an affiliated business,
computertradingpost.com, Inc. (“CTP”), for an aggregate purchase price of
$2,217,000 in cash and directly-related costs of $160,000. At June
30, 2008 and 2007, $1,110,000 and $1,117,000, respectively, were classified as
goodwill based upon the purchase price of $2,377,000 allocated over net tangible
assets acquired of $320,000 and intangible assets acquired of
$947,000. CCE operates a subscription-based dealer-to-dealer Internet
bid-ask market for third-party certified coins.
We were
required to purchase CTP as a condition to its acquisition of CCE. At
the time we consummated the CCE acquisition, we intended to dispose of CTP, and
effective November 30, 2005, disposed of CTP. See Note 4
below.
On
November 8, 2005, we acquired Gem Certification & Appraisal Lab, LLC, a
gemological certification and grading laboratory. As part of that
transaction, we also acquired all of the common stock of Diamond Profile
Laboratory, Inc. (“DPL”), a scientific diamond light performance analysis
laboratory and all publishing and other rights to Palmieri’s Market Monitor, an
educational and informative industry publication. We paid an
aggregate acquisition price of $3,000,000 in cash for GCAL, DPL and the
publishing and other rights to Palmieri’s Market Monitor,
and assumed $50,000 of certain transaction-related costs
and directly-related costs of $218,000 for an aggregate purchase price of
$3,268,000. At June 30, 2007, $3,068,000 of the purchase price was
classified as goodwill based upon the purchase price of $3,268,000 allocated
over net tangible assets acquired of $147,000 and intangible assets acquired of
$53,000.
On
December 22, 2005, we acquired the business and substantially all of the assets
of Gemprint Corporation. These assets consisted primarily of a
patented technology for non-invasive diamond identification which Gemprint used
to digitally capture the unique refractive light pattern (or “Gemprint”) of each
diamond that is processed with that technology. We paid a purchase
price for that business and those assets, consisting of $7,500,000 in cash,
assumed certain pre-acquisition liabilities and a lease commitment in the
aggregate amount of $212,000, and incurred directly-related costs of
$870,000. We also agreed to pay $1 for each diamond that the Company
registers using the Gemprint process in excess of 100,000 registrations during
any year in the five-year period ending December 22, 2010. At June
30, 2007, $5,100,000 were classified as goodwill, respectively, based upon the
aggregate purchase price of $8,582,000 allocated over net tangible assets
acquired of $40,000 and intangible assets acquired of $3,444,000.
GCAL has
incorporated the Gemprint process into its GCAL business process, so that each
GCAL authenticated and graded diamond can also carry a Gemprint image stored in
GCAL’s registered database. The Gemprint process enables GCAL to
provide an additional measure of protection by enabling it to detect
misrepresentations of diamond quality that can occur by, for example, switching
a diamond grading certificate issued for a higher quality diamond to a lower
quality diamond.
On
September 21, 2006, we acquired an existing patent and other intangible assets
from Diamond I.D., Inc. (“DID”) for $332,000, which includes other direct costs
of approximately $37,000, and included these assets as part of intangible
assets, net, on the Consolidated Balance Sheets at June 30, 2007. The
acquisition of those assets did not constitute a business
combination. During fiscal years 2008 and 2007, approximately $42,000
and $33,000, respectively, were recorded as amortization expense with respect to
these assets.
As
described in detail in note 2 to the Consolidated Financial Statements under the
heading Goodwill and Other
Intangible Assets, GCAL, Gemprint and the DID asset purchase acquisitions
were combined into a single reporting unit for the purposes of evaluating
goodwill and other long-lived assets for impairment. For the fiscal year ended
June 30, 2008, an impairment loss was recorded as part of impairment loss of
goodwill within the Consolidated Statements of Operations of $7,267,000, which
resulted in a reduction of the carrying value of goodwill to approximately
$899,000 at June 30, 2008. For the same fiscal year, an impairment loss in the
aggregate of $1,817,000 was recorded as part of impairment loss of other
intangible assets and other assets within the Consolidated Statements of
Operations consisting of the impairment loss of $1,508,000 for other intangible
assets, a loss of $133,000 for other assets, and a loss of $176,000 related to
the impairment of equipment. During the fourth quarter of 2008, we determined
that the carrying value of the DID asset acquisition of approximately $257,000
was impaired, and we recorded an impairment loss of $257,000 as part of the
impairment loss of $1,508,000 in connection with other intangible
assets.
As part of the acquisition of GCAL, the
Company acquired certain assets from Gemological Appraisal Association (“GAA”),
a business owned and managed by the current President of GCAL. As part of the
acquisition agreement, GAA entered into a sublease agreement with GCAL, which
expired in May 2008, to sublet 50% of the leased premises of GCAL and also
reimburse GCAL for 50% of other occupancy costs. From the date of acquisition to
June 30, 2006, GAA paid approximately $25,000 under the sub-lease agreement, and
approximately $6,000 for reimbursable occupancy expenses. During
fiscal years 2008 and 2007, GAA paid approximately $45,000 and $45,000 under the
sub-lease agreement and approximately $11,000 and $12,000 for reimbursable
occupancy expenses, respectively. In the normal course of business,
GAA was charged and paid $315 and $2,500 in grading and consultation fees by
GCAL during fiscal years 2008 and 2007.
Effective
July 1, 2006, we acquired the assets and business of Expos Unlimited LLC
(“Expos”), a trade show management company, that operates the Long Beach and the
Santa Clara, California coin, stamp and collectibles expositions. The purchase
price for this business was $2,400,000 in cash and other direct costs of
approximately $75,000. Based on the future revenues of Expos, the
Company may be obligated to make contingent payments of up to an aggregate of
$750,000 in July 2011. A fair value of $1,810,000 was assigned to
identifiable intangible assets, and $193,000 and $529,000 were allocated to net
assets acquired and assumed liabilities, respectively. The
excess of the purchase price that we paid for Expos over the fair values of net
assets acquired and liabilities assumed, which totaled $1,001,000, was recorded
as goodwill for the fiscal years ended June 30, 2008 and 2007.
In
connection with the Company's acquisition of the business and assets of Expos,
the Company assumed a lease for the offices at which Expos conducts its
operations. The landlord under that lease is a trust of which the trustee is the
former president of Expos, who has been retained to provide services to the
Company under a five year consulting agreement for consulting fees of $250,000
per year. The lease provides for lease payments by the Company of $3,000 per
month for a term of three years with a one-time security deposit of
$3,000. The lease is renewable for successive periods of one year
each, subject to the right of either party to terminate the lease prior to
commencement of any such one year renewal period. During fiscal year
2008 and 2007, the Company paid $37,000 and $36,000 in lease payments for the
Expos office site. During fiscal year 2007, the Company paid $3,000
as a security deposit for the lease.
On August
18, 2006, we acquired all the common stock of American Gemological Laboratories
(“AGL”), an international colored gemstone certification and grading
laboratory. AGL is a third party authentication and grading services
for colored gemstones, including colored gemstones that are sold at auctions and
by jewelry retailers. We paid an acquisition price of $3,500,000 in
cash for AGL, approximately $233,000 of other directly-related costs and
$214,000 representing a payment to settle a loan obligation of AGL to the seller
of AGL. In addition, depending on AGL’s future revenues, we may
become obligated to make contingent payments of up to an aggregate of $3,500,000
over the five years following the closing of the acquisition. During
the second quarter of fiscal year 2008, we finalized the previously reported
allocation of the purchase price for AGL over the net assets acquired, including
intangible assets, such that goodwill was revised from $2,083,000 at June 30,
2007 to $2,246,000 prior to the evaluation and ultimate impairment of goodwill
during the fourth quarter of fiscal 2008. For the fourth quarter of
fiscal year 2008, we recorded a goodwill impairment loss of $1,797,000 on the
Consolidated Statements of Operations for the year ended June 30, 2008, which
resulted in a reduction of the carrying value of goodwill to approximately
$449,000 at June 30, 2008. We also recorded impairment losses of
$230,000 and $122,000 in the carrying values of indefinite-lived and
definite-lived other intangible assets, respectively, in the Consolidated
Statements of Operations for fiscal year 2008.
The
operating results of each of these acquired businesses were consolidated into
the Company's financial statements from the respective dates of their
acquisition.
The
following table summarizes the historical purchase price allocations with
respect to the Expos and AGL business acquisitions, and the Diamond I.D. asset
acquisition completed in fiscal year 2007 and the acquisitions made in fiscal
year 2006 for CCE, GCAL, CoinFacts, and Gemprint, and gives effect to the
goodwill impairment loss of $9,064,000 recorded in the fourth quarter of
2008.
|
|
CoinFacts
|
|
|
CCE
|
|
|
GCAL
&
Gemprint
|
|
|
DID
|
|
|
Expos
|
|
|
AGL
|
|
|
Total
|
|
Purchase
Price
|
|
$ |
515 |
|
|
$ |
2,377 |
|
|
$ |
11,850 |
|
|
$ |
332 |
|
|
$ |
2,475 |
|
|
$ |
3,947 |
|
|
$ |
21,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
Assigned to Assets and Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net tangible
assets
|
|
|
- |
|
|
|
320 |
|
|
|
187 |
|
|
|
- |
|
|
|
(336 |
) |
|
|
(1,329 |
) |
|
|
(1,158 |
) |
Intangible assets-finite
lived
|
|
|
- |
|
|
|
908 |
|
|
|
3,064 |
|
|
|
332 |
|
|
|
1,070 |
|
|
|
1,100 |
|
|
|
6,474 |
|
Intangible assets-indefinite
lived
|
|
|
- |
|
|
|
39 |
|
|
|
433 |
|
|
|
- |
|
|
|
740 |
|
|
|
1,930 |
|
|
|
3,142 |
|
Net
assets and liabilities acquired
|
|
|
- |
|
|
|
1,267 |
|
|
|
3,684 |
|
|
|
332 |
|
|
|
1,474 |
|
|
|
1,701 |
|
|
|
8,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
of purchase price (goodwill)
|
|
$ |
515 |
|
|
$ |
1,110 |
|
|
$ |
8,166 |
|
|
$ |
- |
|
|
$ |
1,001 |
|
|
$ |
2,246 |
|
|
$ |
13,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
acquired in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year 2006
|
|
|
515 |
|
|
|
1,117 |
|
|
|
8,167 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9,799 |
|
Fiscal year 2007
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
1,001 |
|
|
|
2,083 |
|
|
|
3,085 |
|
Fiscal year 2008
(adjustments)
|
|
|
- |
|
|
|
(7 |
) |
|
|
(2 |
) |
|
|
- |
|
|
|
- |
|
|
|
163 |
|
|
|
154 |
|
|
|
$ |
515 |
|
|
$ |
1,110 |
|
|
$ |
8,166 |
|
|
$ |
- |
|
|
$ |
1,001 |
|
|
$ |
2,246 |
|
|
$ |
13,038 |
|
Impairment
losses in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
2008
|
|
|
- |
|
|
|
- |
|
|
|
(7,267 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,797 |
) |
|
|
(9,064 |
) |
Goodwill
at June 30, 2008
|
|
$ |
515 |
|
|
$ |
1,110 |
|
|
$ |
899 |
|
|
$ |
- |
|
|
$ |
1,001 |
|
|
$ |
449 |
|
|
$ |
3,974 |
|
Intangible
assets with finite lives for the acquisitions completed in fiscal years 2007 and
2006 are being amortized on a straight-line basis over their estimated useful
lives, as follows:
|
|
CCE
|
|
Gemprint
|
Expos
|
|
AGL
|
|
Customer
relationships
|
|
15
years
|
|
-
|
-
|
|
10
years
|
|
Software/Acquired
technology
|
|
2
years
|
|
-
|
-
|
|
10
years
|
|
Covenant
not to compete
|
|
5
years
|
|
-
|
8
years
|
|
8.5
years
|
|
Technology,
including patents
|
|
-
|
|
10
years
|
-
|
|
-
|
|
Auctioneer
relationships
|
|
-
|
|
-
|
10
years
|
|
-
|
|
Exhibitor
relationships
|
|
-
|
|
-
|
10
years
|
|
-
|
|
The
useful lives subject to amortization preceding the impairment test conducted in
the fourth quarter of 2008 for software/acquired technology and the acquired
patents related to the Gemprint acquisition were 7 and 20 years, respectively,
and were presented separately. Following the impairment review, these
intangible assets were combined into “technology, including patents” and subject
to a revised period of amortization of 10 years following the December 2005
acquisition date.
The
following pro forma financial data presents the unaudited pro-forma consolidated
statements of operations for the Company for the fiscal years ended June 30,
2008, 2007 and 2006 based on the assumption that the AGL and Expos acquisitions
had been completed as of July 1, 2005, rather than on the actual dates of their
acquisition. These pro forma unaudited statements of operations do
not purport to represent what the Company’s actual results of operations would
have been had these acquisitions been consummated on July 1, 2005 and are not
necessarily indicative of the Company’s results of operations for any subsequent
fiscal year.
|
|
Unaudited
|
|
|
|
Fiscal
Year Ended June 30,
(In
Thousands, except per share data)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenue
|
|
$ |
41,984 |
|
|
$ |
40,529 |
|
|
$ |
39,693 |
|
Operating
income
(loss)
|
|
|
(17,768 |
) |
|
|
(2,948 |
) |
|
|
3,712 |
|
Interest
income,
net
|
|
|
1,117 |
|
|
|
2,123 |
|
|
|
1,958 |
|
Other
income
|
|
|
5 |
|
|
|
6 |
|
|
|
24 |
|
Income
(loss) before provision for income taxes
|
|
|
(16,646 |
) |
|
|
(819 |
) |
|
|
5,694 |
|
Provision
(benefit) for income
taxes
|
|
|
(1,016 |
) |
|
|
(53 |
) |
|
|
2,547 |
|
Income
(loss) from continuing
operations
|
|
|
(15,630 |
) |
|
|
(766 |
) |
|
|
3,147 |
|
Income
from discontinued
operations
|
|
|
(2 |
) |
|
|
228 |
|
|
|
309 |
|
Net
income
(loss)
|
|
$ |
(15,632 |
) |
|
$ |
(538 |
) |
|
$ |
3,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$ |
(1.85 |
) |
|
$ |
(0.09 |
) |
|
$ |
0.36 |
|
Income from discontinued
operations
|
|
$ |
- |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
Net income
(loss)
|
|
$ |
(1.85 |
) |
|
$ |
(0.06 |
) |
|
$ |
0.39 |
|
4. Discontinued
Operations
In fiscal
2004, we implemented a plan to focus our financial and management resources, and
collectibles expertise, on the operations and growth of our grading and
authentication businesses, and to divest our collectibles auctions and direct
sales businesses.
Accordingly,
in accordance with SFAS No. 144, the assets and related liabilities of the
collectibles sales businesses, and Computertradingpost.com, Inc. (“CTP”) (see
below), have been classified as held for sale in the accompanying Consolidated
Balance Sheets at June 30, 2008 and 2007 and the related operating results have
been classified as discontinued operations in the accompanying Consolidated
Statements of Operations for the fiscal years ended June 30, 2008, 2007 and
2006.
We
retained certain assets and liabilities of the collectibles sales businesses,
which we have disposed of or liquidated subsequent to the disposition of those
businesses. In addition, we realized certain additional contingent
consideration on the sale of one of those businesses, which was recognized when
the amount of that consideration became determinable.
In
connection with and as a condition of our acquisition of CCE in September 2005,
we were required to purchase the common stock of CTP, an entity affiliated with
the owner of CCE. Our intent at the date of acquisition was to
dispose of CTP, and we disposed of CTP in November 2005. The
operating results of CTP are classified as part of discontinued operations from
the date of its acquisition through the date of its disposal, and we recognized
a loss of $16,000 on the disposal of CTP. As part of the
consideration for the sale of CTP, we recorded a note receivable of $458,000,
bearing interest at 10% per annum and payable over five years. We
have a security interest in the assets of CTP and certain personal assets of the
purchaser. At June 30, 2008 and 2007, the carrying values of the note
were $230,000 and $321,000, respectively, of which the current portion, at June
30, 2008 and 2007 was approximately $92,000, and is included as part of the
current portion of receivables from sale of net assets of discontinued
operations.
The
operating results of the discontinued collectible sales businesses and CTP which
are included in the accompanying Consolidated Statements of Operations, are as
follows (in thousands):
|
|
Years
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
revenues
|
|
$ |
28 |
|
|
$ |
84 |
|
|
$ |
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from
operations
|
|
|
(3 |
) |
|
|
140 |
|
|
|
161 |
|
Gain
on sale of discontinued businesses
|
|
|
|
|
|
|
259 |
|
|
|
408 |
|
|
|
|
(3 |
) |
|
|
399 |
|
|
|
569 |
|
Income
tax expense
(benefit)
|
|
|
(1 |
) |
|
|
171 |
|
|
|
273 |
|
Income
(loss) from discontinued operations
|
|
$ |
(2 |
) |
|
$ |
228 |
|
|
$ |
296 |
|
The
following table contains summary balance sheet information (in thousands) with
respect to the liabilities of the collectible sales businesses held for sale
that is included in the accompanying Consolidated Balance Sheets:
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
Current
liabilities:
|
|
|
|
|
|
|
Other current
liabilities
|
|
$ |
9 |
|
|
|
- |
|
|
|
$ |
9 |
|
|
$ |
- |
|
Inventories
consist of the following at June 30:
|
|
(in
thousands)
|
|
|
|
2008
|
|
|
2007
|
|
Coins
|
|
$ |
751 |
|
|
$ |
253 |
|
Other
collectibles
|
|
|
28 |
|
|
|
33 |
|
Grading
raw materials consumable inventory
|
|
|
295 |
|
|
|
247 |
|
|
|
|
1,074 |
|
|
|
533 |
|
Less
inventory
reserve
|
|
|
(91 |
) |
|
|
(91 |
) |
|
|
$ |
983 |
|
|
$ |
442 |
|
The
inventory reserve represents a valuation allowance on certain items of our coins
and other collectibles inventories based upon our review of the current market
value of such coins and collectibles.
6.
|
Customer
Notes Receivable
|
During
the fourth quarter of 2005, our wholly-owned subsidiary, Collectors Finance
Corporation (CFC), implemented a dealer financing program, pursuant to which it
offers short term loans to collectibles dealers and customers with established
credit histories that are willing to collateralize the loans with coins or other
collectibles that have been or will be authenticated and graded by
us. A customer is required to repay the loan at maturity or, if
sooner, on return to the customer of the coins or other collectibles that
collateralize the loan. In the event that we return only a portion of
the coins or other collectibles being held as collateral for the loan, then the
customer is required to make a principal reduction payment at that time to
maintain adequate collateral coverage for the loan or to pledge other
collectibles as security for the loan. These short term loans bear
interest at a rate based on the prevailing prime rate of interest at the time
the loan is made.
The
following table sets forth, in thousands of dollars, the total principal amounts
of loans made to customers, net of repayments, or the total amounts of customer
repayments, net of loans made, under the dealer finance program in fiscal years
2008, 2007 and 2006 respectively.
|
|
Years
Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Loan
advances
(repayments)
|
|
$ |
3,106 |
|
|
$ |
(1,378 |
) |
|
$ |
2,253 |
|
During
the fourth quarter of fiscal year 2008, CFC made the decision to sell certain
loans outstanding. In the event of a sale of such notes, the related
collateral will be transferred to the buyer. At June 30, 2008,
approximately $3,579,000 of CFC customer notes receivable were reclassified as
held for sale on the Consolidated Balance Sheet in accordance with SOP No. 01-6,
Accounting by Certain Entities
That Lend to or Finance the Activities of Others, which requires that
financial instruments such as notes receivables be classified as held for sale
with a value that is the lower of cost or market once a decision has been made
to sell such loans. See note 18.
In
addition to the principal amounts loaned by CFC under this program, we recorded
a note receivable from a customer in the principal amount of $132,000, in
September 2006 that matured and was repaid in December 2007. Because
the stated interest rate on that note was 0%; we discounted the note to a
carrying value of approximately $114,000 at September 30, 2006 using an imputed
interest rate, per annum, of 11.25%, which was the interest rate applied to
similar notes receivables held by CFC. At June 30, 2007, the carrying
value of the note was approximately $124,000, and, accordingly, $10,000 and
$8,000 were recorded as interest income during the fiscal years ended June 30,
2007 and 2008, respectively.
We
routinely perform an analysis of the expected collectability of customer notes
receivable based on several factors, including the age and extent of significant
past due amounts, economic conditions or trends that may adversely affect the
ability of customers to pay those notes and the value of the collateral securing
the repayment of the outstanding balances and may establish an allowance for
possible losses on those notes based on those analyses. At June
30, 2008 and 2007, we had allowances for uncollectible amounts of $31,000 and
$23,000, respectively, to cover deficiencies in collateral.
7.
|
Property
and Equipment
|
Property
and equipment consist of the following at June 30:
|
|
(in
thousands)
|
|
|
|
2008
|
|
|
2007
|
|
Coins,
stamp, and gemstone grading reference sets
|
|
$ |
610 |
|
|
$ |
222 |
|
Computer
hardware and
equipment
|
|
|
1,876 |
|
|
|
1,664 |
|
Computer
software
|
|
|
1,035 |
|
|
|
1,027 |
|
Equipment
|
|
|
4,206 |
|
|
|
3,366 |
|
Furniture
and office
equipment
|
|
|
1,117 |
|
|
|
1,064 |
|
Leasehold
improvements
|
|
|
1,598 |
|
|
|
1,452 |
|
Trading
card reference
library
|
|
|
52 |
|
|
|
52 |
|
|
|
|
10,494 |
|
|
|
8,847 |
|
Less
accumulated depreciation and amortization
|
|
|
(6,012 |
) |
|
|
(4,766 |
) |
Property
and equipment,
net
|
|
$ |
4,482 |
|
|
$ |
4,081 |
|
Depreciation
and amortization expense relating to property and equipment for fiscal 2008,
2007 and 2006 was $1,246,000, $891,000 and $486,000,
respectively. During the year ended June 30, 2008, we recorded
$176,000 as part of impairment loss of other intangible assets and other assets
within the Consolidated Statements of Operations in connection with the
impairment of equipment used in the Gemprint business. In fiscal year 2007, we
recorded an aggregate amount of $39,000 consisting of $25,000 of equipment used
in the Gemprint business and $14,000 of equipment acquired, but not used, by a
business unrelated to the jewelry businesses.
Accrued
liabilities consisted of the following at June 30:
|
|
(in
thousands)
|
|
|
|
2008
|
|
|
2007
|
|
Warranty
reserve
|
|
$ |
687 |
|
|
$ |
735 |
|
Professional
fees
|
|
|
125 |
|
|
|
183 |
|
Other
|
|
|
954 |
|
|
|
1,236 |
|
|
|
$ |
1,766 |
|
|
$ |
2,154 |
|
Warranty
reserve activity and balances related to fiscal years 2008, 2007 and 2006, were
as follows (in
thousands):
Warranty
reserve June 30, 2005
|
|
$ |
609 |
|
Charged
to cost of revenues
|
|
|
492 |
|
Payments
|
|
|
(391 |
) |
Warranty
reserve at June 30, 2006
|
|
|
710 |
|
Charged
to cost of revenues
|
|
|
389 |
|
Payments
|
|
|
(364 |
) |
Warranty
reserve at June 30, 2007
|
|
$ |
735 |
|
Charged
to cost of revenues
|
|
|
1,329 |
|
Payments
|
|
|
(1,377 |
) |
Warranty
reserve at June 30, 2008
|
|
$ |
687 |
|
Set forth
below are the provision (benefit) for income taxes for the years ended June
30:
|
|
(in
thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
59 |
|
|
$ |
(613 |
) |
|
$ |
2,360 |
|
State
|
|
|
60 |
|
|
|
29 |
|
|
|
9 |
|
|
|
|
119 |
|
|
|
(584 |
) |
|
|
2,369 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,049 |
) |
|
|
705 |
|
|
|
(172 |
) |
State
|
|
|
914 |
|
|
|
(160 |
) |
|
|
536 |
|
|
|
|
(1,135 |
) |
|
|
545 |
|
|
|
364 |
|
Total
provision (benefit) for income taxes
|
|
$ |
(1,016 |
) |
|
$ |
(39 |
) |
|
$ |
2,733 |
|
The
reconciliation of the provision (benefit) for income taxes computed at federal
statutory rates to the provision (benefit) for income taxes for the years ended
June 30 was as follows:
|
|
(in
thousands)
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Provision
at federal statutory rates
|
|
$ |
(5,659 |
) |
|
$ |
(266 |
) |
|
$ |
2,087 |
|
State
income taxes,
net
|
|
|
650 |
|
|
|
(99 |
) |
|
|
356 |
|
Meals
and
entertainment
|
|
|
89 |
|
|
|
94 |
|
|
|
76 |
|
Tax
exempt interest
|
|
|
(162 |
) |
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
|
274 |
|
|
|
227 |
|
|
|
214 |
|
Other
|
|
|
77 |
|
|
|
5 |
|
|
|
- |
|
AGL
goodwill impairment
|
|
|
610 |
|
|
|
- |
|
|
|
- |
|
Valuation
allowances
|
|
|
3,105 |
|
|
|
- |
|
|
|
- |
|
|
|
$ |
(1,016 |
) |
|
$ |
(39 |
) |
|
$ |
2,733 |
|
Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of
deferred taxes as of June 30, 2008 and 2007, were as follows:
|
|
(in
thousands)
|
|
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Stock compensation
costs
|
|
$ |
682 |
|
|
$ |
496 |
|
Reserves and
accruals
|
|
|
1,093 |
|
|
|
1,037 |
|
Net operating loss
carryforward
|
|
|
2,210 |
|
|
|
159 |
|
State
credits
|
|
|
1,049 |
|
|
|
802 |
|
Intangible
assets
|
|
|
867 |
|
|
|
- |
|
Other
|
|
|
141 |
|
|
|
74 |
|
Less: valuation
allowance
|
|
|
(4,572 |
) |
|
|
(22 |
) |
Total deferred tax
assets
|
|
|
1,470 |
|
|
|
2,546 |
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill and
intangibles
|
|
|
- |
|
|
|
(2,298 |
) |
Property and
equipment
|
|
|
- |
|
|
|
(31 |
) |
Other
|
|
|
(75 |
) |
|
|
(66 |
) |
Total deferred tax
liabilities
|
|
|
(75 |
) |
|
|
(2,395 |
) |
Net
deferred tax
assets
|
|
|
1,395 |
|
|
|
151 |
|
Less:
current
portion
|
|
|
(486 |
) |
|
|
(1,020 |
) |
|
|
$ |
909 |
|
|
$ |
(869 |
) |
Realization
of the above deferred tax assets is dependent on generating sufficient taxable
income in future periods and, in the case of the net operating losses, we must
generate sufficient income prior to their expiration and for the California
Enterprise Zone Credits, we must continue to generate taxable income in the
California Enterprise Zone. Due to the length of time and the extent
of the taxable income required to fully realize the deferred tax assets related
to the impairment loss and the California Enterprise Zone Credits, the Company
recorded a valuation allowance against such assets at June 30,
2008.
The Company files income tax returns in
the U.S. federal jurisdiction and various states and has open tax periods for
federal taxes for the years ended June 30, 2005 through June 30, 2007 and for
certain state tax jurisdictions for the years ended June 30, 1999 through June
30, 2007.
At June
30, 2008, the Company had $1,376,000 of California Enterprise Zone
Credits. These credits have no expiration dates, and can only be
utilized to offset taxable income generated in the California Enterprise
Zone. The Company also has federal and state net operating losses of
$5,328,000 and 7,935,000, which will primarily begin to expire in 2027 and
2017.
As
discussed in note 2, during the first quarter of fiscal 2008, the cumulative
effects of applying FIN 48 were recorded as an increase of $170,000 to
accumulated deficit, an increase to income taxes payable of
$279,000 and an increase to net deferred tax assets of
$109,000. Interest and penalties totaled $101,000 as of the date of
adoption of FIN 48 and were accounted for as part of the total adjustment to
accumulated deficit of $170,000.
As of
June 30, 2008, the liability for income taxes associated with uncertain tax
positions was $380,000, including accrued penalties and interest of
$131,000. Of this amount, $261,000, if recognized, would favorably
affect the Company’s effective tax rate and $119,000 would decrease deferred tax
assets.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits,
excluding interest and penalties, is as follows (in 000’s):
Unrecognized
tax benefits balance at June 30, 2007
|
|
$ |
208 |
|
Gross
increased for tax positions of prior years
|
|
|
- |
|
Gross
decreases for tax positions of prior years
|
|
|
- |
|
Gross
increases for tax positions of current year
|
|
|
41 |
|
Settlements
|
|
|
- |
|
Lapse
of statute of limitations
|
|
|
- |
|
Unrecognized
tax benefits balance at June 30, 2008
|
|
$ |
249 |
|
The FIN
48 liability is reviewed quarterly and adjusted as events occur that affect
potential liabilities for additional taxes, such as lapsing of applicable
statutes of limitations, proposed assessments by tax authorities, negotiations
between tax authorities, identification of new issues, and issuance of new
legislation, regulations or case law. Managements believes that
adequate amounts of tax and related interest, if any, have been provided for any
adjustments that may result from these examinations of uncertain tax
positions. The Company does not expect the FIN 48 liability to change
significantly over the next year.
To
provide a source of funds for its dealer financing program, in June 2005 CFC
entered into a two-year revolving bank line of credit agreement that permitted
CFC to borrow, at any one time, up to the lesser of (i) $7,000,000 or (ii) an
amount equal to 85% of the aggregate principal amount of customer receivables
that met the bank’s eligibility criteria. As of June 30, 2008 and
2007, no borrowings had been obtained by CFC under this bank credit
line. The credit line agreement provided that borrowings under this
credit line would bear interest at rates based on the bank’s prime rate or
LIBOR, as applicable, and were to be secured by substantially all the assets of
CFC (including customer receivables and CFC’s security interests in customer
owned loan collateral).
Costs of
approximately $340,000 (comprised of a loan agreement fee, bank fees and legal
fees) were incurred in connection with this line of credit and were amortized to
interest expense using the effective interest method over the term of the
revolving bank line of credit agreement, which was the two years ended June 30,
2007. On a quarterly basis, CFC incurred an unused line fee at a rate
of 0.25% per annum, based on the average daily unused portion of the total
facility during the quarter. On several occasions during fiscal year
2008, the line of credit was extended to new dates and, on May 29, 2008, the
maturity date was extended to July 31, 2008 by mutual agreement between the bank
and CFC. The Company did not extend, or renew, the line of credit
past the last extension date of July 31, 2008.
CFC’s
obligations under this line of credit had been guaranteed by the Company
pursuant to a Continuing Guaranty Agreement with the bank lender. The
terms of that Agreement required the Company to be in compliance with certain
financial and other restrictive covenants, and require the consent of the lender
(i) for the Company to pay cash dividends or repurchase shares of its
common stock in amounts exceeding its annual net income in any year, and
(ii) to consummate more than $5,000,000 of business acquisitions in any
year.
11. Employee
Benefit Plans
We
established an employee benefit plan, effective July 1992, that features a
401(k) salary reduction provision covering all employees who meet the
eligibility requirements of the plan. Eligible employees are able to
defer up to the lesser of 75% of their base compensation or the statutorily
prescribed annual limit.
12. Stockholders’
Equity
Dividends
On May
31, 2006, the Company adopted a dividend policy that called for the payment of
quarterly cash dividends, each in the amount of $0.08 per share for an expected
total annual cash dividend of $0.32 per common share. The first of
such quarterly cash dividends under this policy of $0.08 per share was paid on
June 28, 2006.
The
quarterly dividend has since been increased by the Board of Directors on two
occasions: (i) from $0.08 to $0.12 per share of common stock
effective in the third quarter of 2006; and (ii) from $0.12 to $0.25 per share
of common stock, effective in the first quarter of fiscal 2008. During fiscal
2008, 2007 and 2006, the Company paid consecutive cash dividends in the
aggregate amounts of approximately $8,517,000, $3,350,000 and $674,000,
respectively.
The
declaration of cash dividends in the future, pursuant to the Company’s dividend
policy, is subject to final determination each quarter by the Board of Directors
based on a number of factors, including the Company’s financial performance and
its available cash resources, its cash requirements and alternative uses of cash
that the Board may conclude would represent an opportunity to generate a greater
return on investment for the Company. On September 26, 2008, the
Board of Directors approved a suspension of the quarterly cash dividend in the
future and also approved a 10% stock dividend, which will be distributed on
November 3, 2008 to all stockholders of record as of October 20, 2008 (see note
18).
Stock
Buyback Program
On
December 6, 2005, we announced that our Board of Directors had approved a stock
buyback program authorizing us to make up to $10,000,000 of stock repurchases in
the open market or private transactions, in accordance with applicable SEC
rules. During the fiscal years ended June 30, 2008, 2007 and 2006,
pursuant to this program we repurchased and retired approximately 232,000,
72,000 and 182,000 shares, respectively, of our common stock, for aggregate
purchase prices (including transaction costs) totaling approximately $2,209,000,
$949,000 and $2,628,000, respectively. Accordingly, common stock at
par value and additional paid-in capital were reduced by the $2,209,000 and
$949,000, respectively, in the Consolidated Balance Sheets as of June 30, 2008
and 2007. We are under no obligation to repurchase any additional shares under
this program, and the timing, actual number and value of any additional shares
that may be repurchased under this program will depend on a number of factors,
including the Company’s future financial performance, the Company’s available
cash resources and competing uses for the cash, prevailing market prices of the
Company’s common stock and the number of shares that become available for sale
at prices that the Company believes are attractive.
Treasury
Stock
Pursuant
to a program approved by the Board of Directors in 2000, we had purchased
125,000 of our shares at an average price of $8.16 per share during the period
from September 25, 2000 to December 28, 2000 at an aggregate cost of
$1,021,000. During fiscal year 2007, we retired all of these
shares and recorded a decrease to additional paid-in capital at June 30,
2007. Prior to that time, the repurchased shares were recorded as
treasury shares in our Consolidated Balance Sheets.
Consulting
Agreement
In July
1997, we granted options to an individual to purchase 133,000 shares of our
common stock at an exercise price of $1.31 per share as consideration for a
five-year consulting agreement that commenced on July 1, 1997. The
options vested in five annual installments of 20% of the shares beginning on
December 31, 1997 and continuing through December 31, 2001. In
January 2007, these options were fully exercised, and as a result, the related
estimated tax benefit of $623,000 was recorded as part of the $633,000 credited
to stockholders’ equity in fiscal 2007.
Supplier
Compensation Cost
During
fiscal 1999, we granted warrants to purchase up to an aggregate of 150,000
shares of our common stock, at an exercise price of $20.00 per share, to
collectible experts providing content for our websites. These
warrants vested immediately and are exercisable over a ten-year
term. The fair value of these warrants was expensed in fiscal 1999,
and all of these warrants were outstanding at June 30, 2008.
13.
|
Stock
Incentive Plans
|
Through
December 5, 2006, we had various stock incentive plans (the “Existing Plans”)
which set aside a total of 1,479,750 shares of our common stock for grants of
stock options and awards of restricted stock to our officers and other key
employees and directors.
The
Existing Plans provided that the exercise price of all options (whether
incentive or non-statutory), and the purchase price of shares issued pursuant to
restricted stock purchase rights, could not be less than 100% of the fair market
value of the shares subject to such options or rights (as the case may be) on
the date of grant. However, the exercise price of incentive stock
options granted to any individual possessing 10% or more of the voting power of
all classes of our stock (a “10% stockholder”) may not be granted at less than
110% of the fair market value of a share of common stock on the grant
date. The timing of exercise for individual option grants and
restricted stock awards was at the discretion of the Compensation Committee of
the Board of Directors. Options could be granted for a term of not
more than ten years after the grant date (five years in the case of incentive
stock options to any 10% stockholder). In the event of a change in
control of the Company, an option or award of shares under the Existing Plans
would become fully exercisable if an agreement was not reached that provided for
the surviving corporation to assume such options or awards or to substitute
comparable options or awards for the options and awards granted under these
Plans and any options that were not exercised by the consummation date of the
change of control would automatically terminate.
On
December 5, 2006, the Board of Directors adopted and our stockholders approved
the 2006 Equity Incentive Plan (“2006 Plan”), which provides for the grant of
stock options, stock appreciation rights (commonly referred to as “SARs”),
restricted stock purchase rights and restricted stock units (collectively,
“stock awards”), to officers and other employees and non-employee directors of
and consultants to the Company or its subsidiaries. At the time of
the adoption of the 2006 Plan, a total of 444,000 shares of common stock were
still available for the future grant of stock options and restricted stock
awards under the Existing Plans.
Pursuant
to the provisions of the 2006 Plan, those 444,000 shares were “rolled over” into
and became available for grants of stock awards only under the 2006 Plan and the
right to grant additional stock awards under the Existing Plans
terminated. In addition, while the stock options and restricted
shares that were outstanding under the Existing Plans, which covered a total of
911,000 shares at the time the 2006 Plan was approved, were unaffected by the
adoption of the 2006 Plan, in the event any of those stock awards were to
terminate or any shares that were subject to outstanding stock options or
restricted stock awards under the Existing Plans were to be reacquired by the
Company, those shares will become available for future grants of stock awards
under the 2006 Plan, rather than under the Existing Plans. As a
result, the adoption of the 2006 Plan did not increase the number of shares
authorized for issuance under the Company’s stock incentive
plans. Instead, the 2006 Plan was adopted to provide greater
flexibility to the Company in terms of the types of stock incentives that could
be granted to eligible participants. At June 30, 2008, a total of
357,000 shares of common stock were available for future grants under the 2006
Plan and no shares were available for new grants under any of the other
plans.
The
following is a summary of stock option activity in the fiscal years 2008, 2007
and 2006 under the 2006 Plan, and each of the Existing Plans (in thousands,
except per share data).
|
|
Number
of
Shares
|
|
|
Exercise
Price
Per Share
|
|
|
Weighted
Average Exercise Price Per Share
|
|
Options
outstanding as June 30, 2005
|
|
|
976 |
|
|
$ |
2.55 |
|
|
|
-
|
|
|
$ |
24.00 |
|
|
$ |
12.49 |
|
Granted
|
|
|
42 |
|
|
|
12.90 |
|
|
|
-
|
|
|
|
14.00 |
|
|
|
13.73 |
|
Cancelled
|
|
|
(82 |
) |
|
|
3.08 |
|
|
|
-
|
|
|
|
20.00 |
|
|
|
15.52 |
|
Exercised
|
|
|
(47 |
) |
|
|
2.55 |
|
|
|
-
|
|
|
|
13.73 |
|
|
|
5.20 |
|
Options
outstanding at June 30, 2006
|
|
|
889 |
|
|
$ |
3.08 |
|
|
|
-
|
|
|
$ |
24.00 |
|
|
$ |
12.65 |
|
Granted
|
|
|
65 |
|
|
|
13.70 |
|
|
|
-
|
|
|
|
14.09 |
|
|
|
13.67 |
|
Cancelled
|
|
|
(13 |
) |
|
|
3.08 |
|
|
|
-
|
|
|
|
20.00 |
|
|
|
15.11 |
|
Exercised
|
|
|
(29 |
) |
|
|
3.08 |
|
|
|
-
|
|
|
|
11.58 |
|
|
|
3.56 |
|
Options
outstanding at June 30, 2007
|
|
|
912 |
|
|
$ |
3.08 |
|
|
|
-
|
|
|
$ |
24.00 |
|
|
$ |
12.98 |
|
Granted
|
|
|
30 |
|
|
|
14.50 |
|
|
|
-
|
|
|
|
14.50 |
|
|
|
14.50 |
|
Cancelled
|
|
|
(23 |
) |
|
|
3.08 |
|
|
|
-
|
|
|
|
19.60 |
|
|
|
14.35 |
|
Exercised
|
|
|
(76 |
) |
|
|
3.08 |
|
|
|
-
|
|
|
|
13.73 |
|
|
|
4.22 |
|
Options
outstanding at June 30, 2008
|
|
|
843 |
|
|
$ |
3.08 |
|
|
|
|
|
|
$ |
24.00 |
|
|
$ |
13.79 |
|
The total
pre-tax intrinsic value of options exercised during fiscal years 2008, 2007 and
2006 were $649,000, $285,000 and $462,000, respectively. Total fair
value of options vested during 2008, 2007 and 2006 were $665,000, $656,000 and
$671,000, respectively.
The
following table summarizes information about stock options outstanding at June
30, 2008:
|
|
|
|
|
|
Outstanding
Options
|
|
|
Exercisable
Options
|
|
Range
of Exercise Price
|
|
|
Number
of
Shares Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
($000’s)
Aggregate
Intrinsic
Value
|
|
|
Number
of
Shares Exercisable
|
|
|
Weighted
Average Exercise Price
|
|
|
($000’s)
Aggregate
Intrinsic Value
|
|
$ |
3.08 |
|
|
$ |
3.80 |
|
|
|
60 |
|
|
|
4.4 |
|
|
$ |
3.45 |
|
|
$ |
281 |
|
|
|
60 |
|
|
$ |
3.45 |
|
|
$ |
281 |
|
$ |
5.28 |
|
|
$ |
7.60 |
|
|
|
60 |
|
|
|
5.4 |
|
|
$ |
7.60 |
|
|
|
31 |
|
|
|
60 |
|
|
$ |
7.60 |
|
|
|
31 |
|
$ |
8.00 |
|
|
$ |
12.00 |
|
|
|
176 |
|
|
|
4.9 |
|
|
$ |
10.36 |
|
|
|
2 |
|
|
|
164 |
|
|
$ |
10.27 |
|
|
|
2 |
|
$ |
12.90 |
|
|
$ |
19.60 |
|
|
|
448 |
|
|
|
6.9 |
|
|
$ |
15.72 |
|
|
|
- |
|
|
|
260 |
|
|
$ |
16.78 |
|
|
|
- |
|
$ |
20.00 |
|
|
$ |
20.00 |
|
|
|
60 |
|
|
|
0.8 |
|
|
$ |
20.00 |
|
|
|
- |
|
|
|
60 |
|
|
$ |
20.00 |
|
|
|
- |
|
$ |
20.10 |
|
|
$ |
24.00 |
|
|
|
39 |
|
|
|
2.7 |
|
|
$ |
22.99 |
|
|
|
- |
|
|
|
37 |
|
|
$ |
23.19 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
843 |
|
|
|
5.5 |
|
|
$ |
13.79 |
|
|
$ |
314 |
|
|
|
641 |
|
|
$ |
13.67 |
|
|
$ |
314 |
|
At June
30, 2008, unvested stock options to purchase up to a total of approximately
202,000 shares were outstanding with a weighted average contractual remaining
life of 7.1 years and at a weighted average exercise price of
$14.17. As of the same date, the aggregate intrinsic value of the
unvested options (based on a closing price of our shares, as reported by Nasdaq,
of $8.11) was $0. At June 30, 2008, and based upon the estimated
forfeiture rate of 5% per annum and the remaining vesting terms of these
options, the number of options expected to vest over their remaining vesting
terms was approximately 191,000 options. At June 30, 2007, unvested
stock options to purchase up to a total of approximately 277,000 shares of our
common stock were outstanding with a weighted average contractual remaining life
of 7.8 years and at a weighted average exercise price of $14.00. As
of the same date, the aggregate intrinsic value of the unvested options (based
on a closing price of our shares, as reported by Nasdaq, of $15.29) was
approximately $505,000.
The
weighted-average fair values of stock options granted during fiscal 2008, 2007
and 2006 were $3.80, $5.56 and $6.57 per option share,
respectively.
The
following table presents the non-vested status of the restricted shares for the
fiscal years ended June 30, 2008 and 2007 and their respective weighted average
grant date fair values. No restricted shares were issued prior to
fiscal year 2007.
Non-Vested
Shares:
|
|
Shares
|
|
|
Weighted
Average
Grant-Date
Fair
Value
|
|
Non-vested
at June 30, 2006
|
|
|
- |
|
|
$ |
- |
|
Granted
|
|
|
56,760 |
|
|
|
13.65 |
|
Vested
|
|
|
(6,530 |
) |
|
|
13.40 |
|
Forfeited or
Cancelled
|
|
|
- |
|
|
|
- |
|
Non-vested
at June 30, 2007
|
|
|
50,230 |
|
|
$ |
13.68 |
|
Granted
|
|
|
21,359 |
|
|
|
14.12 |
|
Vested
|
|
|
(25,808 |
) |
|
|
13.73 |
|
Forfeited or
Cancelled
|
|
|
- |
|
|
|
- |
|
Non-vested
at June 30, 2008
|
|
|
45,781 |
|
|
$ |
13.86 |
|
14.
|
Related-Party
Transactions
|
DHRCC,
which is wholly owned by David Hall, the President and a director and a
stockholder of the Company, and Van Simmons, who is a director and a stockholder
of the Company, has subleased from the Company, through November 6, 2009,
approximately 2,200 square feet of office space, located at the Company’s
offices in Santa Ana, California, at a rent equal to between $1.50 and $1.75 per
square foot per month. That rent, per square foot, is equal to the
rent that was being paid to the Company by a prior unaffiliated subtenant for
comparable space in the same building under a sublease entered into by the
Company in March 2004. Rent received under the DHRCC sublease, which
commenced on March 1, 2004, totaled $43,620 in fiscal 2008, $42,370 in fiscal
2007 and $41,059 in fiscal 2006.
The
above-described transactions with DHRCC were approved by the disinterested
members of the Company’s Board of Directors.
During
fiscal years 2008, 2007 and 2006, the Company charged, and DHRCC paid,
approximately $30,450, $35,000 and $29,000 for advertising fees, approximately
$2,000, $1,000 and $3,000 for grading and authentication fees and DHRCC was paid
approximately $20,000, $52,000 and $53,000 for warranty claims, respectively.
During fiscal year 2008 and 2007, DHRCC attended the Expos Long Beach shows and
paid approximately $7,300 and $5,200, respectively, in fees to Expos and also
paid CCE $5,800 and $3,500 in monthly subscriber fees during fiscal year 2008
and 2007, respectively.
During
fiscal year 2008, David Hall paid $4,400 in grading and authentication fees for
personal sportscards submitted. Also, a member of the immediate
family of David Hall won a prize of $11,000 in the PCGS 2006 World Series of
Grading Contest. Separately, this individual paid $2,900 in grading
and authentication fees to PCGS during fiscal year 2008. The grading
fees charged by the Company to both individuals, were comparable to the fees
charged by the Company in the ordinary course of business to unaffiliated
customers for similar services.
An
individual who served as a member of the board of directors in fiscal 2006 and
in the first five months of fiscal 2007, is also a partner in a professional
services firm that provided legal services to the Company. In fiscal
2006 and 2007, the member was paid $23,750 and $37,500 respectively, as Board
fees; and the professional services firm was paid $211,000 and $189,000,
respectively, for legal services rendered to the Company. At June 30,
2007, amounts payable to this firm were $53,000 and are included on the
Consolidated Balance Sheets in accounts payable and accrued liabilities,
respectively.
Employee Note
Receivable
In
January 2008, we issued a note receivable to an employee who is an executive of
the Company, but not a corporate officer, in the amount of $75,000, bearing no
interest rate, and due and payable in annual amounts of $16,500, $25,000 and
$33,500 in September 2008, 2009 and 2010, respectively.
15. Commitments
and Contingencies
Leases
The
Company has various operating lease commitments for facilities and equipment
that expire through December 2017. In December 2007, the Company
entered into a new lease obligation of approximately $3,800,000 over a 10-year
period for space for its colored gemstone business. Under the terms
of the lease, the Company is expected to extend this space by December 31, 2008,
such that gross lease obligations over the remaining term of that lease will
increase to approximately $5,700,000.
In
accordance with SFAS No. 13, the Company’s total rent expense is recognized on a
straight-line basis over the lease period. Total rent expense, net of
sublease income, was approximately $2,451,000, $2,226,000 and $1,629,000,
respectively, for the years ended June 30, 2008, 2007 and 2006. At
June 30, 2008 and 2007, deferred rent (representing the cumulative difference
between rent paid and the rent expense recognized) was $584,000 and $477,000,
respectively.
Future
minimum lease payments (set forth in thousands) under these agreements are as
follows:
|
|
|
|
|
|
Company’s
Gross
Payment
|
|
|
Sublease
Income
|
|
|
Net
|
|
2009
|
|
$ |
2,261 |
|
|
$ |
52 |
|
|
$ |
2,209 |
|
2010
|
|
|
1,431 |
|
|
|
21 |
|
|
|
1,410 |
|
2011
|
|
|
990 |
|
|
|
- |
|
|
|
990 |
|
2012
|
|
|
1,019 |
|
|
|
- |
|
|
|
1,019 |
|
2013
|
|
|
1,014 |
|
|
|
- |
|
|
|
1,014 |
|
Thereafter
|
|
|
4,086 |
|
|
|
- |
|
|
|
4,086 |
|
|
|
$ |
10,801 |
|
|
$ |
73 |
|
|
$ |
10,728 |
|
Employment
Agreements
The
Company has entered into employment agreements with certain executive officers
and other key employees. The employment agreements provide for
minimum salary levels, incentive compensation and severance benefits, among
other items.
Guarantees
As
discussed in Note 10 above, the Company guaranteed the obligations of CFC under
its bank line of credit, which expired July 31, 2008. However, since
CFC is a wholly-owned, consolidated subsidiary of the Company, its line of
credit borrowings, which the Company has guaranteed, are required to be set
forth on our Consolidated Balance Sheets. There were no such
borrowings outstanding at June 30, 2008 or 2007 and the line of credit and the
guarantees expired on July 31, 2008.
Indemnification
Obligations
The
Company from time to time enters into certain types of contracts that
contingently require the Company to indemnify parties against third-party
claims. These contracts primarily relate to (i) agreements
pursuant to which the Company has sold its discontinued collectibles sales
businesses and which require the Company to indemnify the purchasers from
certain contingent liabilities that might arise from the operation of those
businesses prior to their sale by the Company, which is customary in business
sale transactions such as these; (ii) certain real estate leases under
which the Company may be required to indemnify property owners for environmental
or other liabilities and other claims arising from the Company’s use of the
applicable premises; and (iii) certain agreements with the Company’s
officers and directors, under which the Company may be required to indemnify
such persons for liabilities arising out of their relationships as officers or
directors of the Company. The terms of such indemnification
obligations vary by contract and in most instances a specific or maximum dollar
amount is not explicitly stated therein. Historically, the Company
has not been obligated to make significant payments under, and no liabilities
have been recorded in the accompanying Consolidated Balance Sheets for these
indemnification obligations.
Legal
Actions and Settlements
Bill Miller v. Collectors
Universe, Inc. As previously reported, the Company was a
defendant in this legal action, which was brought in the Superior Court of
California, County of Orange, by Bill Miller, a former employee of the Company,
and an expert in the authentication of autographs and memorabilia. In his
suit, Miller alleged that the Company had issued authentication certificates
bearing his name without his consent, in violation of a California statute
prohibiting unauthorized appropriation of a person’s name, signature or
likeness. The statute provides that a person whose name, signature or
likeness has been misappropriated, in violation of the statute, is entitled to
recover the greater of $750 or the actual damages suffered as a result of the
unauthorized use, and any profits that were attributable to that unauthorized
use that are not taken into account in computing the actual damages. The
Company denied Miller’s allegations and asserted that he was not entitled to any
recovery under the statute in excess of his actual damages and that he had not
suffered any actual damages as a result of the issuance of the
certificates.
Also, as
previously reported, at the conclusion of the trial, which took place in October
2005, (i) the jury found that the Company had used Miller’s name without
his consent on 14,060 authentication certificates, but that Miller had sustained
actual damages from that use totaling $14,060; and (ii) the parties entered
into a stipulated judgment in the case, which, among other things, provided that
Miller’s statutory damages arising from the actions of the Company were zero,
and the Company was entitled to recover $37,812 from Miller on a cross
complaint. The court left unresolved and for future determination the
issue of which party, if any, was the prevailing party in the lawsuit, which
would determine which party, if any, is entitled to recover its attorney’s fees
from the other party.
In March,
2005, Miller filed an appeal of the trial court’s ruling and stipulated judgment
in which he sought, among other things, a finding that as a matter of law, he
was entitled to statutory damages that should be determined by multiplying $750
times the 14,060 authentication certificates on which his name appeared without
his consent, or approximately $10.5 million in total.
On
February 1, 2008, the three-judge Appellate Court ruled unanimously in favor of
the Company, holding that (i) the use of Miller’s name by the Company
constituted, at most, a single violation of the statute in question and,
therefore, Miller was not entitled to multiply $750.00 by the number of times
his name was used; (ii) Miller had the right to file a new trial in an
effort to recover damages for the use by the Company of his name; however, in
that lawsuit he would have to prove that Collectors Universe violated the
statute at issue or common law and, if he succeeded in proving such a violation,
he would have to prove that he incurred actual damages as a result of that
violation in order to recover any amounts against the Company.
In
February, 2008, Miller filed a petition with the California Supreme Court
seeking a review and reversal of the Appellate Court’s decision. On
April 23, 2008, the California Supreme Court denied Miller’s petition for
review. Miller has accepted the judgment for $14,060 plus $750
statutory damages.
However,
in August 2008, the Company and Miller reached a tentative settlement agreement
which provides for a complete release by each party of all known and unknown
claims it has or may have against the other relating to or arising out of the
subject matter of the suit, including the pending claims for recovery of its
legal fees and expenses. The documentation to give effect to the
settlement and mutual release has been prepared and is awaiting signature by the
parties. In the event that Miller does not to sign the documentation,
then, each party would be free to pursue its claims for recovery of its legal
fees and costs from the other party.
Other Legal
Actions
The
Company is named from time to time, as a defendant in lawsuits that arise in the
ordinary course of business. Management of the Company believes that
none of those lawsuits currently pending against it is likely to have a material
adverse effect on the Company.
During
fiscal 2007, two legal settlements, in the aggregate amount of $73,000, were
recognized in the Consolidated Statements of Operations of the
year.
Operating
segments are defined as the components or “segments” of an enterprise for which
separate financial information is available that is evaluated regularly by the
Company’s chief operating decision maker, or decision-making group, in deciding
how to allocate resources to and in assessing performance of those components or
“segments.” The Company’s chief operating decision-maker is its Chief
Executive Officer. The operating segments of the Company are
organized based on the respective services that they offer to customers of the
Company. Similar operating segments have been aggregated to
reportable operating segments based on having similar services, types of
customers, and other criteria that are set forth in SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information.
For our
continuing operations, we operate principally in four reportable service
segments: coins, sportscards, jewelry and other high-end
collectibles. Services provided by these segments include
authentication, grading, publication advertising and subscription-based
revenues. The other collectibles segment includes autographs, stamps,
currency, the CCE subscription business and our collectibles conventions
business.
We
allocate operating expenses to each service segment based upon activity
levels. The following tables set forth on a business segment basis,
including a reconciliation with the consolidated financial statements, (i)
external revenues, (ii) amortization and depreciation, (iii) impairment losses
and (iv) stock-based compensation expense as significant other non-cash
transactions, and (v) operating income (loss) for the fiscal years ended June
30, 2008, 2007 and 2006. Net identifiable assets and goodwill are provided by
business segment as of June 30, 2008 and 2007. All of our sales and
identifiable assets are located in the United States.
|
|
Fiscal
Years Ended June 30,
|
|
Net
revenues from external customers:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Coins
|
|
$ |
22,925 |
|
|
$ |
23,317 |
|
|
$ |
23,829 |
|
Sportscards
|
|
|
8,982 |
|
|
|
8,797 |
|
|
|
8,461 |
|
Jewelry
|
|
|
1,630 |
|
|
|
1,235 |
|
|
|
373 |
|
Other
|
|
|
8,447 |
|
|
|
7,103 |
|
|
|
4,251 |
|
Total revenue
|
|
$ |
41,984 |
|
|
$ |
40,452 |
|
|
$ |
36,914 |
|
Amortization
and depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Coins
|
|
$ |
248 |
|
|
$ |
205 |
|
|
$ |
114 |
|
Sportscards
|
|
|
125 |
|
|
|
87 |
|
|
|
70 |
|
Jewelry
|
|
|
1,320 |
|
|
|
813 |
|
|
|
185 |
|
Other
|
|
|
419 |
|
|
|
591 |
|
|
|
265 |
|
Total
|
|
|
2,112 |
|
|
|
1,696 |
|
|
|
634 |
|
Unallocated amortization and
depreciation
|
|
|
341 |
|
|
|
316 |
|
|
|
285 |
|
Consolidated amortization and
depreciation
|
|
$ |
2,453 |
|
|
$ |
2,012 |
|
|
$ |
919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Coins
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Sportscards
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Jewelry
|
|
|
11,233 |
|
|
|
41 |
|
|
|
- |
|
Other
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
11,233 |
|
|
|
41 |
|
|
|
- |
|
Unallocated impairment
losses
|
|
|
- |
|
|
|
14 |
|
|
|
- |
|
Consolidated impairment
losses
|
|
$ |
11,233 |
|
|
$ |
55 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Coins
|
|
$ |
194 |
|
|
$ |
80 |
|
|
$ |
192 |
|
Sportscards
|
|
|
18 |
|
|
|
34 |
|
|
|
15 |
|
Jewelry
|
|
|
9 |
|
|
|
8 |
|
|
|
- |
|
Other
|
|
|
165 |
|
|
|
124 |
|
|
|
129 |
|
Total
|
|
|
386 |
|
|
|
246 |
|
|
|
336 |
|
Unallocated stock-based
compensation
|
|
|
839 |
|
|
|
644 |
|
|
|
334 |
|
Consolidated stock-based
compensation
|
|
$ |
1,225 |
|
|
$ |
890 |
|
|
$ |
670 |
|
Operating
income (loss) before unallocated expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Coins
|
|
$ |
6,404 |
|
|
$ |
9,658 |
|
|
$ |
11,542 |
|
Sportscards
|
|
|
1,646 |
|
|
|
1,435 |
|
|
|
1,153 |
|
Jewelry
|
|
|
(18,697 |
) |
|
|
(5,557 |
) |
|
|
(1,459 |
) |
Other
|
|
|
723 |
|
|
|
417 |
|
|
|
6 |
|
Total
|
|
|
(9,924 |
) |
|
|
5,953 |
|
|
|
11,242 |
|
Unallocated operating
expenses
|
|
|
(7,844 |
) |
|
|
(8,885 |
) |
|
|
(7,473 |
) |
Consolidated operating income
(loss)
|
|
$ |
(17,768 |
) |
|
$ |
(2,932 |
) |
|
$ |
3,769 |
|
|
|
At
June 30,
|
|
Identifiable
Assets:
|
|
2008
|
|
|
2007
|
|
Coins
|
|
$ |
3,346 |
|
|
$ |
2,139 |
|
Sportscards
|
|
|
1,035 |
|
|
|
632 |
|
Jewelry
|
|
|
9,061 |
|
|
|
20,435 |
|
Other
|
|
|
11,055 |
|
|
|
7,982 |
|
Total
|
|
|
24,497 |
|
|
|
31,188 |
|
Unallocated
assets
|
|
|
27,521 |
|
|
|
46,913 |
|
Consolidated
assets
|
|
$ |
52,018 |
|
|
$ |
78,101 |
|
Goodwill:
|
|
|
|
|
|
|
|
|
Coins
|
|
$ |
515 |
|
|
$ |
515 |
|
Jewelry
|
|
|
1,348 |
|
|
|
10,251 |
|
Other
|
|
|
2,111 |
|
|
|
2,118 |
|
Consolidated
goodwill
|
|
$ |
3,974 |
|
|
$ |
12,884 |
|
17. Quarterly
Results (unaudited)
The following table sets forth the
unaudited consolidated financials results for quarterly periods in fiscal years
2007 and 2008. The operating loss of $12,906,000 in the fourth quarter of fiscal
2008 includes an aggregate impairment loss of $11,232,000 related to our jewelry
businesses (See notes 2, 3 and 7 to our Consolidated Financial Statements)
consisting of goodwill impairment loss of approximately $9,064,000 and
impairment loss of other intangible assets and other assets of approximately
$2,168,000.
In addition, in the fourth quarter of
fiscal 2008, the Company recorded a valuation allowance of $4,550,000 against
deferred tax assets at June 30, 2008, such that the Company had an income tax
expense of $348,000 in the fourth quarter of fiscal 2008, despite having pre-tax
losses of $12,767,000.
Quarterly
Reports of Operations
|
|
Quarters
Ended
(In
thousands, except per share data)
|
|
|
|
Sept.
30,
2006
|
|
|
Dec.
31,
2006
|
|
|
Mar.
31,
2007
|
|
|
June
30,
2007
|
|
|
Sept.
30,
2007
|
|
|
Dec.
31,
2007
|
|
|
Mar.
31,
2008
|
|
|
June
30,
2008
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$ |
9,898 |
|
|
$ |
8,793 |
|
|
$ |
11,081 |
|
|
$ |
10,680 |
|
|
$ |
10,825 |
|
|
$ |
9,964 |
|
|
$ |
10,896 |
|
|
$ |
10,299 |
|
Cost
of revenues
|
|
|
4,356 |
|
|
|
4,367 |
|
|
|
5,138 |
|
|
|
5,436 |
|
|
|
5,200 |
|
|
|
6,797 |
|
|
|
5,997 |
|
|
|
5,779 |
|
Gross
profit
|
|
|
5,542 |
|
|
|
4,426 |
|
|
|
5,943 |
|
|
|
5,244 |
|
|
|
5,625 |
|
|
|
3,167 |
|
|
|
4,899 |
|
|
|
4,520 |
|
SG&A
expenses
|
|
|
5,241 |
|
|
|
5,089 |
|
|
|
6,126 |
|
|
|
6,626 |
|
|
|
5,965 |
|
|
|
5,590 |
|
|
|
6,124 |
|
|
|
5,874 |
|
Impairment
losses
|
|
|
- |
|
|
|
25 |
|
|
|
14 |
|
|
|
16 |
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
11,232 |
|
Amortization
of intangible assets
|
|
|
171 |
|
|
|
187 |
|
|
|
219 |
|
|
|
373 |
|
|
|
270 |
|
|
|
286 |
|
|
|
317 |
|
|
|
320 |
|
Operating
income (loss)
|
|
|
130 |
|
|
|
(875 |
) |
|
|
(416 |
) |
|
|
(1,771 |
) |
|
|
(611 |
) |
|
|
(2,709 |
) |
|
|
(1,542 |
) |
|
|
(12,906 |
) |
Interest
and other income, net
|
|
|
571 |
|
|
|
548 |
|
|
|
513 |
|
|
|
518 |
|
|
|
445 |
|
|
|
298 |
|
|
|
240 |
|
|
|
139 |
|
Income
(loss) before income taxes
|
|
|
701 |
|
|
|
(327 |
) |
|
|
97 |
|
|
|
(1,253 |
) |
|
|
(166 |
) |
|
|
(2,411 |
) |
|
|
(1,302 |
) |
|
|
(12,767 |
) |
Provision
(benefit) for income taxes
|
|
|
318 |
|
|
|
(147 |
) |
|
|
165 |
|
|
|
(375 |
) |
|
|
(66 |
) |
|
|
(962 |
) |
|
|
(336 |
) |
|
|
348 |
|
Income
(loss) from continuing operations
|
|
|
383 |
|
|
|
(180 |
) |
|
|
(68 |
) |
|
|
(878 |
) |
|
|
(100 |
) |
|
|
(1,449 |
) |
|
|
(966 |
) |
|
|
(13,115 |
) |
Income
(loss) from discontinued operations,
net of gain on sales of discontinuedbusinesses
(net of income taxes)
|
|
|
11 |
|
|
|
80 |
|
|
|
99 |
|
|
|
38 |
|
|
|
(10 |
) |
|
|
6 |
|
|
|
- |
|
|
|
2 |
|
Net income
(loss)
|
|
$ |
394 |
|
|
$ |
(100 |
) |
|
$ |
31 |
|
|
$ |
(840 |
) |
|
$ |
(110 |
) |
|
$ |
(1,443 |
) |
|
$ |
(966 |
) |
|
$ |
(13,113 |
) |
Net
income (loss) per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing
operations
|
|
$ |
0.05 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.11 |
) |
|
$ |
(1.57 |
) |
From
discontinued operations,
net of gain on sales of
discontinued
businesses
(net
of income taxes)
|
|
|
- |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net income
(loss)
|
|
$ |
0.05 |
|
|
$ |
(0.01 |
) |
|
$ |
0.00 |
|
|
$ |
(0.10 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.11 |
) |
|
$ |
(1.57 |
) |
Net
income (loss) per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing
operations
|
|
$ |
0.04 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.11 |
) |
|
$ |
(1.57 |
) |
From
discontinued operations,
net of gain on sales of
discontinued
businesses (net
of income taxes)
|
|
|
- |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
income (loss)
|
|
$ |
0.04 |
|
|
$ |
(0.01 |
) |
|
$ |
0.00 |
|
|
$ |
(0.10 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.17 |
) |
|
$ |
(0.11 |
) |
|
$ |
(1.57 |
) |
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,351 |
|
|
|
8,309 |
|
|
|
8,381 |
|
|
|
8,433 |
|
|
|
8,463 |
|
|
|
8,491 |
|
|
|
8,470 |
|
|
|
8,373 |
|
Diluted
|
|
|
8,628 |
|
|
|
8,309 |
|
|
|
8,587 |
|
|
|
8,433 |
|
|
|
8,463 |
|
|
|
8,491 |
|
|
|
8,470 |
|
|
|
8,373 |
|
18. Subsequent
Events
On July
14, 2008, the Company announced that the quarterly dividend of $0.25 per share
of common stock will be paid on September 2, 2008 to shareholders of record as
of August 19, 2008 (see note 12). That quarterly dividend was paid,
in the aggregate amount of $2,088,000 on September 2, 2008.
On September 26, 2008 the Board of
Directors approved a suspension in the payment by the Company of cash dividends
in the future and also approved a 10% stock dividend, which will be
distributed on November 3, 2008 to all stockholders of record as of October 20,
2008.
During
2009, the Company sold, without recourse, certain of its CFC coin loans for
approximately $3,300,000. These loans were sold for an amount that was about
0.7% over par value.
|
|
Schedule
II
Valuation
and Qualifying Accounts
|
|
Description
|
|
Balance
at Beginning
of
Period
|
|
|
Charged
to Operating Expenses
|
|
|
Charged
to Cost of Revenues
|
|
|
Charged
to
Tax
Provision
|
|
|
Net
Deductions
|
|
|
Balance
at
End
of
Period
|
|
Allowance
for doubtful accounts
|
|
$ |
38,000 |
|
|
$ |
23,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(24,000 |
) |
|
$ |
37,000 |
|
Allowance
for customer notes receivable
|
|
|
- |
|
|
|
16,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16,000 |
|
Inventory
reserve
|
|
|
34,000 |
|
|
|
- |
|
|
|
72,000 |
|
|
|
- |
|
|
|
- |
|
|
|
106,000 |
|
Total at June 30,
2006
|
|
$ |
72,000 |
|
|
$ |
39,000 |
|
|
$ |
72,000 |
|
|
$ |
- |
|
|
$ |
(24,000 |
) |
|
$ |
159,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
37,000 |
|
|
$ |
- |
|
|
$ |
42,000 |
|
|
$ |
- |
|
|
$ |
(19,000 |
) |
|
$ |
60,000 |
|
Allowance
for customer notes receivable
|
|
|
16,000 |
|
|
|
7,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
23,000 |
|
Inventory
reserve
|
|
|
106,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(15,000 |
) |
|
|
91,000 |
|
Valuation
allowance for deferred taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22,000 |
|
|
|
- |
|
|
|
22,000 |
|
Total at June 30,
2007
|
|
$ |
159,000 |
|
|
$ |
7,000 |
|
|
$ |
42,000 |
|
|
$ |
22,000 |
|
|
$ |
(34,000 |
) |
|
$ |
196,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
60,000 |
|
|
$ |
- |
|
|
$ |
47,000 |
|
|
$ |
- |
|
|
$ |
(28,000 |
) |
|
$ |
79,000 |
|
Allowance
for customer notes receivable
|
|
|
23,000 |
|
|
|
8,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
31,000 |
|
Inventory
reserve
|
|
|
91,000 |
|
|
|
- |
|
|
|
13,000 |
|
|
|
- |
|
|
|
(13,000 |
) |
|
|
91,000 |
|
Valuation
allowance for deferred taxes
|
|
|
22,000 |
|
|
|
- |
|
|
|
- |
|
|
|
4,550,000 |
|
|
|
- |
|
|
|
4,572,000 |
|
Total at June 30,
2008
|
|
$ |
196,000 |
|
|
$ |
8,000 |
|
|
$ |
60,000 |
|
|
$ |
4,550,000 |
|
|
$ |
(41,000 |
) |
|
$ |
4,773,000 |
|
NONE
Disclosure
Controls and Procedures
Our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) are designed to provide
reasonable assurance that information required to be disclosed in our reports
filed under that Act (the Exchange Act), such as this Annual Report on Form
10-K, is recorded, processed, summarized and reported within the time periods
specified in the rules of the Securities and Exchange Commission. Our
disclosure controls and procedures also are designed to provide reasonable
assurance that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosures.
Our
management, under the supervision and with the participation of our Chief
Executive Officer and the Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures in effect as of June 30,
2008. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of June 30, 2008, our disclosure controls
and procedures were effective to provide reasonable assurance that material
information is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, and that such information is
recorded, summarized and properly reported within the appropriate time period,
relating to the Company and its consolidated subsidiaries, required to be
included in our Exchange Act reports, including this Annual Report on Form
10-K.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting that
occurred during our fourth fiscal quarter ended June 30, 2008 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
Management
of Collectors Universe, Inc. is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Our internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of
America. Internal control over financial reporting includes those
written policies and procedures that:
§
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets;
|
§
|
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of
America;
|
§
|
provide
reasonable assurance that our receipts and expenditures are being made
only in accordance with authorization of our management and directors;
and
|
§
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of assets that could have a
material effect on our consolidated financial
statements.
|
Internal
control over financial reporting includes the controls themselves, monitoring
and internal auditing practices and actions taken to correct deficiencies as
identified.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions or because the degree of
compliance with the policies or procedures may deteriorate.
Management’s
Assessment and Determination
Our
management assessed the effectiveness of Collectors Universe’s internal control
over financial reporting as of June 30, 2008, based on criteria for effective
internal control over financial reporting described in “Internal Control –
Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Management’s assessment included an evaluation
of the design and the testing of the operational effectiveness of Collectors
Universe’s internal control over financial reporting. Management
reviewed the results of its assessment with the Audit Committee of our Board of
Directors.
Based on
that assessment, management determined that, as of June 30, 2008, Collectors
Universe, Inc. maintained effective internal control over financial
reporting.
Grant
Thornton LLP, independent registered public accounting firm, which audited and
reported on our consolidated financial statements for the fiscal year ended June
30, 2008 which are included in this Annual Report on Form 10-K, has audited the
effectiveness of our internal control over financial reporting as of June 30,
2008 as stated in their report set forth below.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Collectors
Universe, Inc. and Subsidiaries
We have
audited Collectors Universe Inc. and subsidiaries’ internal control over
financial reporting as of June 30, 2008 based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Collectors Universe
Inc. and subsidiaries’ management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on Collectors
Universe Inc. and subsidiaries’ internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we consider necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Collectors Universe, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of June 30,
2008, based on criteria established in Internal Control – Integrated Framework
issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Collectors
Universe Inc. and subsidiaries as of June 30, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the three years ended June 30, 2008, and our report dated September 29,
2008 expressed an unqualified opinion.
/s/ GRANT
THORNTON LLP
Irvine,
California
September
29, 2008
None
PART
III
Except
for information concerning the Company's executive officers, which is included
in Part I of this Annual Report, the information required by Item 10 is
incorporated by reference from the Company's definitive proxy statement,
expected to be filed with the Commission on or before October 28, 2008, for the
Company’s 2008 annual stockholders' meeting.
The
information required by Item 11 is incorporated herein by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or before October 28, 2008 for the Company’s 2008 annual stockholders'
meeting.
Except
for the information below regarding our equity compensation plans, the
information required by Item 12 is incorporated herein by reference from
the Company's definitive proxy statement, expected to be filed with the
Commission on or before October 28, 2008, for the Company’s 2008 annual
stockholders' meeting.
The
following table provides information relating to our equity compensation plans
as of June 30, 2008.
|
|
Column
A
|
|
|
Column
B
|
|
|
Column
C
|
|
|
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
and Restricted Shares
|
|
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants
|
|
|
Number
of Securities Remaining Available for Future Issuance under Equity
Compensation Plans (Excluding Securities Reflected in Column
A)
|
|
Equity
compensation plans approved
by stockholders
|
|
|
831,000 |
|
|
$ |
13.84 |
|
|
|
357,000 |
|
Equity
compensation not approved by
stockholders (1)
|
|
|
162,000 |
|
|
|
20.00 |
|
|
|
- |
|
Total
|
|
|
993,000 |
|
|
$ |
14.72 |
|
|
|
357,000 |
|
(1)
|
Warrants
to purchase common stock granted to non-employee service providers in the
fiscal year ended June 30, 1997, which was prior to the time that the
Company became a reporting company under the Securities Exchange Act of
1934, as amended.
|
The
information required by Item 13 is incorporated herein by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or before October 28, 2008, for the Company’s 2008 annual stockholders’
meeting.
The
information required by Item 14 is incorporated herein by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or before October 28, 2008, for the Company’s 2008 annual stockholders’
meeting.
PART
IV
(a)(1)
|
Financial
Statements
|
The
following financial statements are included in Item 8 of Form 10-K:
Report
of Independent Registered Public Accounting Firm
|
|
Consolidated
Balance Sheets as of June 30, 2008 and 2007
|
|
Consolidated
Statements of Operations for the years ended June 30, 2008, 2007 and
2006
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended June 30, 2008, 2007
and 2006
|
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2008, 2007 and
2006
|
|
Notes to the Consolidated Financial
Statements
|
(a)(2)
|
Financial Statement
Schedule
|
Schedule
II Valuation and Qualifying Accounts
|
|
Other
schedules are omitted because the required information is either
inapplicable or has been disclosed in the consolidated financial
statements and notes thereto.
|
See
Index to Exhibits immediately following the Signature Page of this Annual
Report for a list of the Exhibits required, pursuant to Item 601 of
Regulation S-K, to be filed with this Annual Report.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the
registrant has duly caused this Annual Report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
COLLECTORS
UNIVERSE, INC
|
|
|
Date: September
30, 2008
|
By: /s/ JOSEPH J.
WALLACE
|
|
Joseph
J. Wallace, Chief Financial Officer
|
POWER
OF ATTORNEY
Each
person whose signature to this Annual Report appears below hereby appoints
Michael R. Haynes and Joseph J. Wallace, and any of them, individually, to act
severally as attorneys-in-fact and agents, with power of substitution and
resubstitution, for each of them, to sign on his or her behalf, individually and
in the capacities stated below, and to file, any and all amendments to this
Annual Report, which amendment or amendments may make changes and additions as
such attorneys-in-fact may deem necessary or appropriate.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
/s/ A. CLINTON
ALLEN
A.
Clinton Allen
|
|
Chairman
of the Board and Director
|
|
September
30, 2008
|
/s/ MICHAEL R.
HAYNES
Michael
R. Haynes
|
|
Chief
Executive Officer and Director, (Principal
Executive Officer)
|
|
September
30, 2008
|
/s/ DAVID HALL
David
G. Hall
|
|
President
and Director
|
|
September
30, 2008
|
/s/
JOSEPH J. WALLACE
Joseph
J. Wallace
|
|
Chief
Financial Officer, (Principal
Financial and Accounting Officer)
|
|
September
30, 2008
|
/s/ VAN D.
SIMMONS
Van
D. Simmons
|
|
Director
|
|
September
30, 2008
|
/s/ A. J. BERT
MOYER
A.
J. Bert Moyer
|
|
Director
|
|
September
30, 2008
|
/s/
DEBORAH A. FARRINGTON
Deborah
A. Farrington
|
|
Director
|
|
September
30, 2008
|
/s/
MICHAEL J. MCCONNELL
Michael
J. McConnell
|
|
Director
|
|
September
30, 2008
|
/s/ BRUCE
A. STEVENS
Bruce
A. Stevens
|
|
Director
|
|
September
30, 2008
|
Exhibit
No.
|
|
Description
|
|
|
|
1.1
|
|
Form
of Underwriting Agreement.*
|
1.2
|
|
Form
of Underwriting Agreement between Collectors Universe and Thomas Weisel
Partners LLC, Needham & Company, Inc. and Roth Capital Partners
LLC. Incorporated by reference to Exhibit 1.1 to Amendment No.
1 to the Company’s Registration Statement on Form S-3 (File No.
333-122129), filed on February 14, 2005.
|
3.2
|
|
Amended
and Restated Certificate of Incorporation of Collectors
Universe. Incorporated by reference to Exhibit 3.2 to the
Company’s Registration Statement on Form S-3 (File No. 333-122129), filed
on January 19, 2005.
|
3.2.1
|
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation of
Collectors Universe. Incorporated by reference to Exhibit 3.2.1
to the Company’s Registration Statement on Form S-3 (File No. 333-122129),
filed on January 19, 2005.
|
3.3
|
|
Amended
and Restated Bylaws of Collectors Universe, as adopted and effective
December 5, 2007. Incorporated by reference to Exhibit 3.3 to
the Company’s Current Report on Form 8-K dated
|
4.1
|
|
Registration
Rights Agreement.*
|
4.2
|
|
Form
of Registration Rights Agreement for Stockholders pursuant to private
placement.*
|
5.1
|
|
Opinion
of Stradling Yocca Carlson & Rauth, a Professional
Corporation.*
|
10.1
|
|
Collectors
Universe 1999 Stock Incentive Plan.*
|
10.2
|
|
Form
of Stock Option Agreement for the Collectors Universe 1999
Plan.*
|
10.4
|
|
PCGS
1999 Stock Incentive Plan.*
|
10.5
|
|
Form
of Stock Option Agreement for the PCGS 1999 Plan.*
|
10.6
|
|
Employee
Stock Purchase Plan.*
|
10.7
|
|
Form
of indemnification Agreement.*
|
10.8
|
|
Asset
Acquisition Agreement dated January 25, 1999 between Professional Coin
Grading Service, Inc.,
Info
Exchange, Inc. and Brent Gutenkunst.*
|
10.9
|
|
Collectors
Universe/eBay Mutual Services Term Sheet dated February 10, 1999, between
the Company and eBay, Inc.*
|
10.10
|
|
Net
Lease between Orix Searls Santa Ana Venture and Collectors Universe, dated
June, 1999.*
|
10.11
|
|
Agreement
for the Sale of Goods and Services dated March 31,1999, between the
Company and DNA Technologies, *
|
10.12
|
|
Contribution
and Acquisition Agreement dated February 3, 1999, between the Company and
Hugh Sconyers.*
|
10.13
|
|
Contribution
and Acquisition Agreement dated February 3, 1999, between the Company and
BJ Searls.*
|
10.14
|
|
Contribution
and Acquisition Agreement dated February 3, 1999, between the Company and
Greg Bussineau.*
|
10.15
|
|
Contribution
and Acquisition Agreement dated February 3, 1999, between the Company and
Lyn F. Knight Rare Coins*
|
10.16
|
|
Contribution
and Acquisition Agreement dated February 3, 1999, between the
Company,
Kingswood
Coin Auction, LLC and the Members of Kingswood.*
|
10.17
|
|
Contribution
and Acquisition Agreement dated February 3, 1999, between the
Company
and
Professional Coin Grading Service, Inc.*
|
10.18
|
|
Employment
Agreement dated March 1999, between Superior Sportscard Auctions, LLC and
Greg Bussineau.*
|
10.19
|
|
Employment
Agreement dated March 5, 1999, between Lyn F. Knight, Lyn Knight Currency
Auctions, Inc.
and
Collectors Universe.*
|
10.24
|
|
Asset
Purchase Agreements between Collectors Universe, Inc. and Auctions by
Bowers and Merena, Inc., Bowers and Merena Galleries, Inc. and Bowers and
Merena Research, Inc. (Incorporated by reference to Exhibit 10.1 to
Registrant’s Current Report on Form 8-K, dated March 21,
2000).*
|
10.25
|
|
Asset
Purchase Agreements dated February 19, 2004 between Collectors Universe,
Inc. and Spectrum Numismatics, Inc. (Incorporated by reference to Exhibit
10.1 to Registrant’s Current Report on Form 8-K, dated February 19,
2004).
|
10.26
|
|
Non-Competition
Agreement dated February 19, 2004 between Collectors Universe, Inc. and
Spectrum Numismatics, Inc. (Incorporated by reference to Exhibit 10.2 to
Registrant’s Current Report on Form 8-K, dated February 19,
2004).
|
10.27
|
|
Collectors
Universe 2003 Stock Incentive Plan. Incorporated by reference
to Exhibit 10.1 to the Company’s Registration Statement on Form S-8 (File
No. 333-121035), filed on December 6, 2004.
|
10.28
|
|
Form
of Stock Option Agreement for 2003 Stock Incentive
Plan. Incorporated by reference to Exhibit 10.2 to the
Company’s Registration Statement on Form S-8 (File No. 333-121035), filed
on December 6, 2004.
|
10.29
|
|
Form
of Restricted Stock Purchase Agreement for 2003 Stock Incentive
Plan. Incorporated by reference to Exhibit 10.3 to the
Company’s Registration Statement on Form S-8 (File No. 333-121035), filed
on December 6, 2004.
|
10.30
|
|
Employment
Agreement, dated January 1, 2003, between the Company and Michael
Haynes. Incorporated by reference to Exhibit 10.30 to the
Company’s Registration Statement on Form S-3 (File No. 333-122129), filed
on January 19, 2005.
|
10.30.1
|
|
First
Amendment to Employment Agreement, dated October 1, 2003, between the
Company and Michael Haynes. Incorporated by reference to Exhibit 10.30.1
to the Company’s Registration Statement on Form S-3 (File No. 333-122129),
filed on January 19, 2005.
|
INDEX TO
EXHIBITS
(Continued)
Exhibit
No.
|
|
Description
|
|
|
|
10.30.2
|
|
Second
Amendment to Employment Agreement, dated November 1, 2004, between the
Company and Michael Haynes. Incorporated by reference to Exhibit 10.30.2
to the Company’s Registration Statement on Form S-3 (File No. 333-122129),
filed on January 19, 2005.
|
10.31
|
|
2005
Management Bonus Plan. Incorporated by reference to Exhibit
10.99 to the Company’s Quarterly Report on
Form
10-Q for the quarter ended December 31, 2004, filed with the Commission on
February 14, 2005
|
10.32
|
|
Loan
and Security Agreement between Collectors Finance Corporation and
California Bank & Trust
dated
as of June 30, 2005.
|
10.33
|
|
Continuing
Guaranty issued as of June 30, 2005 by Collectors Universe, Inc. to
California Bank & Trust.
|
10.34
|
|
Asset
Purchase Agreement among Collectors universe, inc., Gemprint Corporation,
CVF Technologies Corporation, Heptagon Investments Ltd. and 1456733
Ontario, Inc., dated November 25, 2005, providing for the Company’s
acquisition of the assets of Gemprint Corporation. Incorporated
by reference to Exhibit 10.34 to the Company’s Quarterly Report on Form
10-Q for the quarter ended December 31, 2005, filed with the Commission on
February 9, 2006.
|
10.35
|
|
Employment
Agreement Extension between Collectors Universe, Inc. and Michael R.
Haynes. Incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated March 17, 2006 and filed with
the Commission on March 23, 2006.
|
10.36
|
|
2006
Management Bonus Plans. Incorporated by reference to Exhibit
10.1 to the Company’s Current Report on Form 8-K dated March 17, 2006 and
filed with the Commission on March 23, 2006.
|
10.37
|
|
Employment
Agreement Extension between Collectors Universe, Inc. and Michael R.
Haynes. Incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated September 19,
2006.
|
10.38
|
|
Description
of 2007 Management Bonus Plan. Incorporated by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K dated November
17, 2006.
|
10.39
|
|
Letter
Agreement dated July 23, 2007 with Michael J. McConnell, relating to his
election to and service on the Collectors Universe, Inc. Board of
Directors. Incorporated by reference to Exhibit 99.1 to the
Company’s Current Report on
Form
8-K dated July 20, 2007.
|
10.40
|
|
Employment
Agreement Extension between Collectors Universe, Inc. and Michael R.
Haynes. Incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated October 24, 2007 and filed with
the Commission on October 25, 2007.
|
10.41
|
|
Collectors
Universe, Inc. 2008 Management Bonus Plan. Incorporated by
reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
dated November 14, 2007.
|
21.1
|
|
Subsidiaries
of the Registrant.
|
23.1
|
|
Consent
of Independent Registered Public Accounting Firm
|
31.1
|
|
Certifications
of CEO Under Section 302 Of The Sarbanes-Oxley Act.
|
31.2
|
|
Certifications
of CFO Under Section 302 Of The Sarbanes-Oxley Act.
|
32.1
|
|
CEO
Certification of Periodic Report Under Section 906 of the Sarbanes-Oxley
Act.
|
32.2
|
|
CFO
Certification of Periodic Report Under Section 906 of the Sarbanes-Oxley
Act.
|
*
|
Incorporated
by reference to the same numbered exhibit to the Company’s Registration
Statement (No. 333-86449) on Form S-1 filed with the Commission on
September 2, 1999.
|